Tyler owns a two-stock portfolio that invests in Happy Dog Soap Company (HDS) and Black Sheep Broadcasting (BSB). Three-quarter of Tyler's portfolio value consists of HDS's shares, and the balance consists of BSB'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 Occurrence
|
Happy Dog Soap
|
Black Sheep Broadcasting
|
|
Strong
|
50%
|
48%
|
67%
|
|
Normal
|
25%
|
29%
|
38%
|
|
Weak
|
25%
|
-38%
|
-48%
|
Calculate expected returns for the individual stocks in Tyler'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 21.75%
The expected rate of return on Black Sheep Broadcasting's stock over the next year is 31.00%
The expected rate of return on Tyler's portfolio over the next year is 24.06%