Suppose Megan owns a two-stock portfolio that invests in Happy Dog Soap Company (HDS) and Black Sheep Broadcasting (BSB). Three-quarters of Megan’s portfolio value consists of Happy Dog Soap’s shares, and the remaining balance consists of Black Sheep Broadcasting’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 Expected Returns Occurrence HDS BSB Strong 20% 50% 70% Normal 35% 30% 40% Weak 45% -40% -50% Calculate the expected returns for the individual stocks in Megan’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 Happy Dog Soap’s stock over the next year is . • The expected rate of return on Black Sheep Broadcasting’s stock over the next year is . • The expected rate of return on Megan’s portfolio over the next year is .
Suppose Megan owns a two-stock portfolio that invests in Happy Dog Soap Company (HDS) and Black Sheep Broadcasting (BSB). Three-quarters of Megan’s portfolio value consists of Happy Dog Soap’s shares, and the remaining balance consists of Black Sheep Broadcasting’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 Expected Returns Occurrence HDS BSB Strong 20% 50% 70% Normal 35% 30% 40% Weak 45% -40% -50% Calculate the expected returns for the individual stocks in Megan’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 Happy Dog Soap’s stock over the next year is . • The expected rate of return on Black Sheep Broadcasting’s stock over the next year is . • The expected rate of return on Megan’s portfolio over the next year is .
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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Suppose Megan owns a two-stock portfolio that invests in Happy Dog Soap Company (HDS) and Black Sheep Broadcasting (BSB). Three-quarters of Megan’s portfolio value consists of Happy Dog Soap’s shares, and the remaining balance consists of Black Sheep Broadcasting’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
|
Expected Returns
|
|
|---|---|---|---|
|
Occurrence
|
HDS
|
BSB
|
|
| Strong | 20% | 50% | 70% |
| Normal | 35% | 30% | 40% |
| Weak | 45% | -40% | -50% |
Calculate the expected returns for the individual stocks in Megan’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 Happy Dog Soap’s stock over the next year is . |
| • | The expected rate of return on Black Sheep Broadcasting’s stock over the next year is . |
| • | The expected rate of return on Megan’s portfolio over the next year is . |
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