The probability distribution of a stock's expected returns is shown below

Finance Dec 23, 2020

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%

Expert Solution

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%

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