If Microsoft stockholders expect either a 25% return or a 2% return,each with a 50% probability,and Apple Computer shareholders expect a 10% return with certainty,what is the expected return from a portfolio comprised of equal amounts of stock from both firms?
A) 37.00%
B) 23.50%
C) 11.75%
D) 10.75%
E) 12.33%

Question

Quizplus · Accepted Answer

Step 1 - Compute the expected returns of each stock in the portfolio. Expected return = E(k) = Pr₁k₁ + Pr₂k₂ + ... + Pr_nk_n Expected return = (0.50 × 0.25) + (.50 × 0.02)Expected return = 0.135 Step 2 - Use the expected returns of each stock to compute the expected return on the portfolio. E(k_p) = w₁E(k₁) + w₂E(k₂) + ... + w_nE(k_n) E(k_p) = (.50 × .135) + (.50 × .10) = .1175 or 11.75%

If Microsoft Stockholders Expect Either a 25% Return or a 2