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Calculate the expected rate of return

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Reference no: EM133123678

Consider the following possible rates of returns on stock A, stock B, and stock C over the next year:

State of economy

Probability of state occurring

Return on stock A

Return on stock B

Return on stock C

Recession

0.2

-6%

18%

-5%

Normal

0.5

10%

6%

8%

Boom

0.3

16%

-18%

10%
  1. Calculate the expected rate of return and standard deviation of a portfolio that is composed of 40% of A and 60% of B?
  2. What will be the expected return and standard deviation of your investment, if you invest $4,800 in stock A, $3,600 in stock B, and $3,600 in stock C for one year? What will the expected return, if the holding period is 7 months?
  3. Are there diversification benefits associated with forming the portfolio in part (d)? Explain why or why not.

Reference no: EM133123678

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