3. Statisticalmeasures of standalone risk Suppose Kate owns a two-stock portfolio that invests in Falcon Freight Company (FF) and Pheasant Pharmaceuticals (PP). Three-quarters of Kates portfolio value consists of Falcon Freights shares, and the remaining balance consists of Pheasant Pharmaceuticalss shares. Each stocks 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 Expected Return FF PP

Strong 20% 20% 28% Normal 35% 12% 16% Weak 45% -16% -20%

Calculate the expected returns for the individual stocks in Kates 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 Falcon Freights stock over the next year is (1.35%, 0.85%, 1.20%, 1.00%)

The expected rate of return on Pheasant Pharmaceuticalss stock over the next year is (2.20%, 2.73%, 1.43%, 2.49%)

The expected rate of return on Kates portfolio over the next year is (1.30%, 1.56%, 1.10%, 1.76%)