Assuming that the three economic outcomes (1)

have an equal likelihood of occurring and (2) that the good economy is twice as likely to take place as the other two:

a. Calculate individual expected returns for each subsidiary.

b. Calculate implicit portfolio weights for each subsidiary and an expected return and variance for the equity in the ABCO conglomerate.

ABCO is a conglomerate that has $4 billion in common stock. Its capital is invested in four subsidiaries:
entertainment (NET), consumer products (CON), pharmaceuticals (PHA), and insurance (INS). The four subsidiaries are expected to perform differently, depending on the economic environment.AppendixLO1

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Investment Poor in $millions Economy Average Good Economy Economy ENT $1,200 +20% -5% -8% CON 800 +15 +10 -20 PHA 1,400 -10 -5 +27 INS 600 -10 +10 +10