Assume that there are three stocks, A, B, and C, and that you can either invest in these stocks or short sell them. There are also three possible states of nature for economic growth in the upcoming year: strong, moderate, or weak. The returns for the upcoming year on stocks A, B, and C for each of these states of nature are given below:

State of Nature

Stock Strong Growth Moderate Growth Weak Growth

A 37 % 14.00 % - 8 %

B 31 % 12.00 % - 4 %

C 33 % 22.00 % - 6 %

If you invested in an equally weighted portfolio of stocks A and C, what is your portfolio return if economic growth is moderate?

Porfolio return is 18%

Explanation:

Portfolio return is the weighted average return which is calculated on the basis of proportion of investment of each stock.

As per given data

Growth Strong Moderate Weak

A 37% 14.00% - 8%

B 31% 12.00% - 4%

C 33% 22.00% - 6%

Investment Ratio

A : C = 1 : 1

Economic Growth is moderate so the growth moderate growth rate is used for the portfolio return calculation

Portfolio return = (Ratio of investment of Stock A x Moderate growth of Stock A) + (Ratio of investment of Stock C x Moderate growth of Stock C)

Portfolio return = (1/2 x 14%) + (1/2 x 22%)

Portfolio return = 7% + 11%

Portfolio return = 18%