What is the expected return of an equally weighted portfolio comprised of the following three stocks? $$\begin{array} { l c c c r }
\text { State of } &\text { Probability of }& { \text { Rate of Return } } \
\text { Economy } & \text { State of Economy } & { \text { if State Occurs } } \

& & \begin{array}{ll} \text { Stock A } & \text { Stock B } & \text { Stock C } \end{array} \
\text { Boom } & .25 &\begin{array}{ccc} .19 \quad \quad \quad& .13 \quad \quad & .07 \quad \quad \end{array} \
\text { Nonnal } & .72 &\begin{array}{ccc} .15 \quad \quad & .05 \quad \quad & .13 \quad \quad \end{array} \
\text { Bust } & .03 & \begin{array}{ccc} - .29 \quad \quad & - .14 \quad \quad & .22 \quad \quad \end{array}
\end{array}$$
A) 9.82 percent
B) 10.96 percent
C) 9.67 percent
D) 10.48 percent
E) 11.33 percent

Question

What is the expected return of an equally weighted portfolio comprised of the following three stocks? $$\begin{array} { l c c c r } 
 \text { State of } &\text { Probability of }& { \text { Rate of Return } } \
 \text { Economy } & \text { State of Economy } & { \text { if State Occurs } } \

& & \begin{array}{ll}   \text { Stock A } & \text { Stock B } & \text { Stock C }  \end{array}  \
\text { Boom } & .25 &\begin{array}{ccc}    .19  \quad  \quad  \quad& .13 \quad  \quad  & .07 \quad  \quad  \end{array} \
\text { Nonnal } & .72 &\begin{array}{ccc}   .15  \quad   \quad  & .05  \quad  \quad & .13 \quad  \quad  \end{array} \
\text { Bust } & .03 & \begin{array}{ccc}   - .29  \quad  \quad & - .14 \quad  \quad  & .22 \quad  \quad  \end{array}
\end{array}$$
A) 9.82 percent
B) 10.96 percent
C) 9.67 percent
D) 10.48 percent
E) 11.33 percent

Quizplus · Accepted Answer

The expected return of an equally weighted portfolio is calculated by averaging the expected returns of each stock across all states of the economy. First, calculate the expected return for each stock by multiplying the return in each state by the probability of that state and summing these products. Then, average these expected returns for the three stocks. The calculations yield an expected return of 10.96 percent.

What Is the Expected Return of an Equally Weighted Portfolio