Problem: What is the expected return on a portfolio if an equal amount is invested in each stock? What would be expected return if 50 percent of your funds is invested in stock A and the remaining funds are split evenly between stocks B and C?
Stock A 7%
Stock B 12
Stock C 20
You are considering two stocks and have determined the following information.
Stock A:
Return Probability of the Return
18% 25%
14 50
10 25
Stock B:
Return Probability of the Return
22% 10%
12 60
11 30
A. Which of the two stocks has the higher expected return?
B. Which stock is riskier?
C. Given your answers to the two previous questions, what stock is preferred?