Stock X shows a possible return distribution of 100%, 50%, 25%, 0%, and –50%, while stock Y has its corresponding distribution of 0%, 10%, 25%, 40%, and 50%, with probability of 1/5 each. You construct a portfolio with 60-40 weights between X and Y (i.e., 60% of your money is invested in Stock X and 40% in Y).
Which is the incorrect statement about the expected returns of X, Y, and the portfolio?
A. The expected return on Stock X is computed as: E(RX) = (100%)(.2) + (50%)(.2) + (25%)(.2) + (0%)(.2) + (–50%)(.2).
B. The expected return on Stock Y is 25%.
C. The expected return on the portfolio in this case is computed as: E(RP) = (25%+25%)/2 = 25%.
D. The expected return on the portfolio is not affected by the relationship between individual stocks.