Question

An analyst has predicted the following returns for Stock A and Stock B in three possible states of the economy State Probabili Boom Normal Recession 0.25 .24 0.27 0.49 0.160.20 0.10 0.17 a. What is the probability of a recession? (Round your answer to 2 decimal places.) Probability 0.26 b. Calculate the expected return for Stock A and Stock B. (Round your answers to 2 decimal places Expected Return Stocks A Stocks B C. Calculate the expected return for a portfolio that is invested 42% in A and 58% in B. (Round your answer to 2 decimal pl aces.) Expected return

Answer 1

Solution : ( a )

$\mathrm{Probability\:of\:a\:recession\:=\:1-(0.25+0.49)=1-0.74=0.26}$

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Solution : ( b )

$\mathrm{Expected \:returns\:for\:Stocks\:A\:=0.25*0.24+0.49*0.16+0.26*0.10=0.06+0.0784+0.026=0.1644=16.44\%}$

$\mathrm{Expected \:returns\:\:for\:Stocks\:B\:=0.25*0.27+0.49*0.20+0.26*0.17=0.0675+0.098+0.0442=0.2097=20.97\%}$

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