Consider a world that only consists of the three stocks shown in the following table:

Stock Total Number of Shares Outstanding Current Price per Share Expected Return First Bank 101 Million $88 20%

Fast Mover 56 Million $107 12%

Funny Bone 232 Million $36 13%

a. Calculate the total value of all shares outstanding currently.

b. What fraction of the total value outstanding does each stock make up?

c. You hold the market portfolio, that is, you have picked portfolio weights equal to the answer to part b (that is, each stock’s weight is equal to its contribution to the fraction of the total value of all stocks). What is the expected return of your portfolio?

AppendixLO1