Jacobs holds a two-stock portfolio that invests in the stocks of Spandelay Indus

Question

Jacobs holds a two-stock portfolio that invests in the stocks of Spandelay Industries Inc. and Nytes Corp. Spandelay Industries Inc. has an allocation of 75% in Jacob's portfolio. Each stock's expected return for the next year will depend on the market condition. The expected returns from the stocks in different market conditions are given in the following table:

Market Condition( range from strong-weak), Probability(Strong .20, Normal .35, weak .45), Spandelay Ind. (Strong 28%, Normal 17%, Weak -22%), Nytex Corp. (Strong 39%, Normal 22%, Weak -28%)

Using the info just given calculate the expected rate of return on the individual stock in Jacob's portfolio and the expected rate of return on the entire portfolio over the next year.

The expected rate of return on Spandelay inc.'s stock over the next year is....(a. 1.98, b. 1.65, c. 1.40, d. 2.23)

The expected rate of return on Nytex Corp.'s stock over the next year is (a. 1.89, b. 3.60, c. 2.90, d. 3.28)

The expected rate of return on Jacob's portfolio over the next year is...(a. 1.67, b. 1.96, c. 2.35, d. 2.65)

Explanation / Answer

for spandelay inc.

Exp Return for spandelay = .2*.28 + .35*.17 - .45*.22 = .056 + .0595 - .099 = .0165 = 1.65%

ans b)

Exp Return for Nytex Corp's = .2*.39 + .35*.22 - .45*.28 = .078 + .077 - .126 = 2.9%

ans c)

expected return of Protfolio = .75*1.65 + .25*2.9 = 1.2375 + .725 = 1.96%

ans b)

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