You decide to invest in a portfolio consisting of 25 percent Stock A, 25 percent Stock B, and the remainder in Stock C. Based on the following information, what is the expected return of your portfolio? State of Economy Probability of State of Economy Return if State Occurs Stock A Stock B Stock C Recession .16 -16.48 -2.78 -21.68 Normal .55 12.68 7.38 15.98 Boom .29 26.28 14.6% 30.5% Multiple Choice 13.09% 12.00% 12.54% 14.18%
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To calculate the expected return for each stock, we multiply the probability of each state occurring by the return for that state, and then sum up the results. For Stock A: Expected return = (Probability of recession * Return in recession) + (Probability of Show more…
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