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Homework answers / question archive / The probability distribution of a stock's expected returns is shown below
The probability distribution of a stock's expected returns is shown below. What is the expected return of each stock? If these two stocks were put in an equally weighted portfolio, what would be the return of the portfolio? Probability Stock) Stock K 0.2 15% -12% 0.3 4% -5% 0.4 -4% 12% 0.1 10% 20%
Expected Return of Stock J = 15% * 0.20 + 4% * 0.30 + (-4%) * 0.40 + 10% * 0.10
= 3.60%
Expected Return of Stock K = -12% * 0.20 + (-5%) * 0.30 + 12 * 0.40 + 20% * 0.10
= 2.90%
Expected Return of the portfolio = Weighted Return of both the stock
= 3.60% * 0.50 + 2.90% * 0.50
= 3.25%
