Fred has been told that diversifying his investments will significantly reduce risk. He has therefore invested in two stocks. His portfolio consists of a $1 500 000 investment in Drugs Limited and $750 000 invested in shares of Pharmaceuticals Limited. Economy Probability Returns Drugs Limited Pharmaceuticals Limited Boom 0.4 12% 19% Normal 0.5 8% 11% Recession 0.1 2% -4% i. What is the expected return on Fred’s portfolio? ii. Advise Huron as to the effectiveness of his diversification strategy.
Fred has been told that diversifying his investments will significantly reduce risk. He has therefore invested in two stocks. His portfolio consists of a $1 500 000 investment in Drugs Limited and $750 000 invested in shares of Pharmaceuticals Limited. Economy Probability Returns Drugs Limited Pharmaceuticals Limited Boom 0.4 12% 19% Normal 0.5 8% 11% Recession 0.1 2% -4% i. What is the expected return on Fred’s portfolio? ii. Advise Huron as to the effectiveness of his diversification strategy.
Chapter1: Taking Risks And Making Profits Within The Dynamic Business Environment
Section: Chapter Questions
Problem 1CE
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Fred has been told that diversifying his investments will significantly reduce risk. He has
therefore invested in two stocks. His portfolio consists of a $1 500 000 investment in Drugs
Limited and $750 000 invested in shares of Pharmaceuticals Limited.
Economy Probability Returns
Drugs Limited Pharmaceuticals
Limited
Boom 0.4 12% 19%
Normal 0.5 8% 11%
Recession 0.1 2% -4%
i. What is the expected return on Fred’s portfolio?
ii. Advise Huron as to the effectiveness of his diversification strategy.
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