David owns a two-stock portfolio that invests in Falcon Freight Company (FF) and Pheasant Pharmaceuticals (PP). Three-quarters of David's portfolio value consists of FF's shares, and the balance consists of PP'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 0.20 0.35 0.45 Strong Normal Weak Falcon Freight Pheasant Pharmaceuticals 40% 24% -32% 56% 32% -40% Calculate expected returns for the individual stocks in David's portfolio as well as the expected rate of return of the entire portfolio over the th possible market conditions next year. • The expected rate of return on Falcon Freight's stock over the next year is
David owns a two-stock portfolio that invests in Falcon Freight Company (FF) and Pheasant Pharmaceuticals (PP). Three-quarters of David's portfolio value consists of FF's shares, and the balance consists of PP'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 0.20 0.35 0.45 Strong Normal Weak Falcon Freight Pheasant Pharmaceuticals 40% 24% -32% 56% 32% -40% Calculate expected returns for the individual stocks in David's portfolio as well as the expected rate of return of the entire portfolio over the th possible market conditions next year. • The expected rate of return on Falcon Freight's stock over the next year is
Managerial Accounting: The Cornerstone of Business Decision-Making
7th Edition
ISBN:9781337115773
Author:Maryanne M. Mowen, Don R. Hansen, Dan L. Heitger
Publisher:Maryanne M. Mowen, Don R. Hansen, Dan L. Heitger
Chapter15: Financial Statement Analysis
Section: Chapter Questions
Problem 12DQ
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![Remember, the expected value of a probability distribution is a statistical measure of the average (mean) value expected to occur during all possible
circumstances. To compute an asset's expected return under a range of possible circumstances (or states of nature), multiply the anticipated return
expected to result during each state of nature by its probability of occurrence.
Consider the following case:
David owns a two-stock portfolio that invests in Falcon Freight Company (FF) and Pheasant Pharmaceuticals (PP). Three-quarters of
David's portfolio value consists of FF's shares, and the balance consists of PP'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 Falcon Freight Pheasant Pharmaceuticals
0.20
0.35
0.45
Strong
Normal
Weak
40%
24%
-32%
56%
32%
-40%
Calculate expected returns for the individual stocks in David'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 Falcon Freight's stock over the next year is](/v2/_next/image?url=https%3A%2F%2Fcontent.bartleby.com%2Fqna-images%2Fquestion%2F2f55ba86-108a-4a48-8fde-acd195122ec7%2Fba7733f9-b305-432a-b37a-72689de3afee%2Fpnb1u9g_processed.png&w=3840&q=75)
Transcribed Image Text:Remember, the expected value of a probability distribution is a statistical measure of the average (mean) value expected to occur during all possible
circumstances. To compute an asset's expected return under a range of possible circumstances (or states of nature), multiply the anticipated return
expected to result during each state of nature by its probability of occurrence.
Consider the following case:
David owns a two-stock portfolio that invests in Falcon Freight Company (FF) and Pheasant Pharmaceuticals (PP). Three-quarters of
David's portfolio value consists of FF's shares, and the balance consists of PP'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 Falcon Freight Pheasant Pharmaceuticals
0.20
0.35
0.45
Strong
Normal
Weak
40%
24%
-32%
56%
32%
-40%
Calculate expected returns for the individual stocks in David'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 Falcon Freight's stock over the next year is
![• The expected rate of return on Pheasant Pharmaceuticals's stock over the next year is
• The expected rate of return on David's portfolio over the next year is
The expected returns for David'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:
PROBABILITY DENSITY
-40
-20
0
Company A
Company B
20
RATE OF RETURN (Percent)
40
60](/v2/_next/image?url=https%3A%2F%2Fcontent.bartleby.com%2Fqna-images%2Fquestion%2F2f55ba86-108a-4a48-8fde-acd195122ec7%2Fba7733f9-b305-432a-b37a-72689de3afee%2Fctvvuc_processed.png&w=3840&q=75)
Transcribed Image Text:• The expected rate of return on Pheasant Pharmaceuticals's stock over the next year is
• The expected rate of return on David's portfolio over the next year is
The expected returns for David'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:
PROBABILITY DENSITY
-40
-20
0
Company A
Company B
20
RATE OF RETURN (Percent)
40
60
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