Ch 08: Assignment - Risk and Rates of Return Consider the following case: Ian owns a two-stock portfolio that invests in Celestial Crane Cosmetics Company (CCC) and Lumbering Ox Truckmakers (LOT). Three- quarters of Ian's portfolio value consists of CCC's shares, and the balance consists of LOT'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: Celestial Crane Cosmetics Market Condition Strong Normal Probability of Occurrence 0.50 37.5% Lumbering Ox Truckmakers 52.5% 30% -37.5% 0.25 22.5% -30% Weak 0.25 Calculate expected returns for the individual stocks in lan's portfolio as well as the expected rate of return or the entire portfolio over the three possible market conditions next year. The expected rate of return on Celestial Crane Cosmetics's stock over the next year is . The expected rate of return on Lumbering ox Truckmakers's stock over the next year is The expected rate of return ofan's portfolio over the next year is The expected returns for lan portofo were calculated based on the possible conditions in the market. Such conditions will vary from time to time and for each condition there will be a specific outcome. These probabilities and outcomes can be represented in the form of a continuous probability distribution graph For example, the continuous pretty distributions of or retumsods for two different companies are shown on the following graph PATYOENSITY