Ch 08: Assignment - Risk and Rates of Return Juan owns a two-stock portfolio that invests in Falcon Freight Company (FF) and Pheasant Pharmaceuticals (PP). Three-quarters of Juan'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 0.25 Falcon Freight 35% Pheasant Pharmaceuticals 49% Strong Normal 0.45 21% 28% -35% Weak 0.30 -28% Calculate expected returns for the individual stocks in Juan'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 Juan's portfolio over the next year is The expected returns for Juan'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: nd Study Tools PROBABILITY DENSITY Ffers Company A Lions Ecess Tips Company B cess Tips OR YOU Tools -40 -20 0 20 40 60 RATE OF RETURN (Percent) ntroductory Based on the graph's information, which of the following statements is true? Company A has lower risk. ck Company B has lower risk. Grac Remember, the expected value of a probability distribution is a statistical measure of the average (mean) value expected to occur during all possible circumstances. To compute an asset's expected return under a range of possible circumstances (or states of nature), multiply the anticipated return expected to result during each state of nature by its probability of occurrence. Consider the following case: Juan owns a two-stock portfolio that invests in Falcon Freight Company (FF) and Pheasant Pharmaceuticals (PP). Three-quarters of Juan'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 Strong Normal Pheasant Pharmaceuticals Probability of Occurrence 0.25 Falcon Freight 35% 49% 0.45 21% 28% Weak 0.30 -28% -35% Calculate expected returns for the individual stocks in Juan's portfolio as well as the expected rate of return of the entire portfolio over the three nossible market ronditions next year Calculate expected returns for the individual stocks In Juan'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 Juan's portfolio over the next year is The expected returns for Juan'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: PROBABILITY DENSITY Company A Company PROBABILITY DENSITY Company A Company B -40 -20 0 20 40 60 RATE OF RETURN (Percent) Based on the graph's information, which of the following statements is true? Company A has lower risk. Company B has lower risk