Reference no: EM132462186
Juanita owns a two-stock portfolio that invests in Celestial Crane Cosmetics Company (CCC) and Lumbering Ox Truckmakers (LOT). Three-quarters of Juanita's portfolio value consists of Celestial Crane Cosmetics's shares, and the balance consists of Lumbering Ox Truckmakers's shares.
Each stock's expected return for the next year will depend on forecasted market conditions. The expected returns from the stocks in different market conditions are detailed in the following table:
Market Condition Probability of Occurrence CCC LOT
Strong 50% 30% 42%
Normal 25% 18% 24%
Weak 25% -24% -30%
Question 1: Calculate the expected returns for the individual stocks in Juanita's portfolio as well as the expected rate of return of the entire portfolio over the three possible market conditions next year.
- The expected rate of return on Celestial Crane Cosmetics's stock over the next year is .
- The expected rate of return on Lumbering Ox Truckmakers's stock over the next year is
- The expected rate of return on Juanita's portfolio over the next year is
The expected returns for Juanita's portfolio were calculated based on three possible conditions in the market. Such conditions will vary from time to time, and for each condition there will be a specific outcome. These probabilities and outcomes can be represented in the form of a continuous probability distribution graph.
For example, the continuous probability distributions of rates of return on stocks for two different companies are shown on the following graph:
Based on the graph's information, which of the following statements is true?
Company
A has a smaller standard deviation.
Company
B has a smaller standard deviation.