Consider the following scenario analysis for stock X and Y. Assume that of your $10,000 portfolio, you invest $6,000 in X and the rest in Y. What is the expected return of your portfolio? Bear Market Normal Market Bull Market
Probability 0.2 0.5 0.3
Stock X -20% 18% 50%
Stock Y -15% 20% 10%

Portfolio r(e) = 0.16 or 16%

Explanation:

We can calculate the expected return of the portfolio by taking the weighted average of the expected return of the individual stocks that form up the portfolio. The formula for the expected return of portfolio is,

Portfolio r(e) = wA * rA  +  wB * rB  + ...  +  wN * rN

Where,

First we need to calculate the expected return of both X and Y.

Expected Return

r - X = 0.2  * -0.2  +  0.5 * 0.18 + 0.3 * 0.5

r - X = 0.2

r - Y = 0.2 * -0.15  +  0.5 * 0.2  +  0.3 * 0.1

r - Y = 0.1

Portfolio r(e) = 6000/10000 * 0.2  +  4000/10000 * 0.1

Portfolio r(e) = 0.16 or 16%

two years ago, when picking flowers in the mountains back of yosemite valley, i found a book. it was blotted and storm-beaten; all of its outer pages were mealy and crumbly. the paper seemed to dissolve like the snow beneath which it had been buried, however; many of the inner pages were well preserved. and although all were more or less stained and torn, whole chapters were easily readable. this is the condition of the great open book of yosemite glaciers today; its granite pages have been torn and blurred by the same storms that wasted the castaway book.

two years ago, when picking flowers in the mountains back of yosemite valley; i found a book. it was blotted and storm-beaten, all of its outer pages were mealy and crumbly. the paper seemed to dissolve like the snow beneath which it had been buried, however, many of the inner pages were well preserved. and although all were more or less stained and torn; whole chapters were easily readable. this is the condition of the great open book of yosemite glaciers today, its granite pages have been torn and blurred by the same storms that wasted the castaway book.

answer blank(1).(2); sharpe;