Suppose we have the following projections on three stocks:
Returns if State Occurs | ||||
Stock C | Stock B | Stock A | Probability of state of Economy | State of Economy |
20% | 15% | 10% | .40 | Boom |
0 | 4 | 8 | .60 | Bust |
We want to calculate portfolio expected returns in two cases. First, what would be the expected
return on a portfolio with equal amounts invested in each of the three stocks?
Second, what would be the expected return if half of the portfolio were in A, with the remainder
equally divided between B and C?