Ch 08: Assignment - Risk and Rates of Return James owns a two-stock portfolio that invests in Falcon Freight Company (FF) and Pheasant Pharmaceuticals (PP). Three-quarters of James's portfolio value consists of FF's shares, and the balance consists of PP'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 Falcon Freight Pheasant Pharmaceuticals Strong 0.20 47.5% 66.5% Normal 0.35 28.5% 38% Weak 0.45 -38% -47.5% Calculate expected returns for the individual stocks in Dames'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 Falcon Freight's stock over the next year is The expected rate of return on Pheasant Pharmaceuticals's stock over the next year is The expected rate of return on James's portfolio over the next year is The expected returns for James's portfolio were calculated based on three 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 probability distributions of rates of return on stocks for two different companies are shown on the following graph: ity distribution graph. vary from time to probabilities and outcomes can be represented in the form of a continuous For example, the continuous probability distributions of rates of return on stocks for two different companies are shown on the following graph: PROBABILITY DENSITY Company Company -60 -20 0 20 40 60 RATE OF RETURN Percent) Based on the graph's information, which statement is false? O Company H has lower risk O Company G has lower risk Grade it Now Save & Continue Continue without saving