State of Probability of Economy State of Economy Stock A Stock B Stock C Boom. 15.39.49.29 Good. 55.15.20.08 Poor. 25 -.01 -.09 -.07 Bust. 05 -.20 -.24 -.10 a. Your portfolio is invested 24 percent each in A and C, and 52 percent in B. What is the expected return of the portfolio? (Do not round intermediate calculaitons. Ent

0.12392 or 12.39%

Explanation:

Expected return (Boom):

= Sum of (Probability * Rate of return) of all the stocks

= 0.24 (0.39) + 0.52 (0.49) + 0.24 (0.29)

= 0.418 or 41.80%

Expected return (Good):

= Sum of (Probability * Rate of return) of all the stocks

= 0.24 (0.15) + 0.52 (0.20) + 0.24 (0.08)

= 0.1592 or 15.92%

Expected return (Poor):

= Sum of (Probability * Rate of return) of all the stocks

= 0.24 (-0.01) + 0.52 (-0.09) + 0.24 (-0.07)

= - 0.066 or - 6.60%

Expected return (Bust):

= Sum of (Probability * Rate of return) of all the stocks

= 0.24 (-0.20) + 0.52 (-0.24) + 0.24 (-0.10)

= - 0.1968 or - 19.68%

Hence,

The expected return of the portfolio is as follows:

E (Rp) = Sum of (Probability of state of economy * Expected return) of all the state of economy

= 0.15 (0.418) + 0.55 (0.1592) + 0.25 (-0.066) + 0.05 (-0.1968)

= 0.12392 or 12.39%