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James holds a two-stock portfolio that invests in the stocks of Dusenburg Group Inc. and Rouster and Sideways Corp. Dusenburg Group Inc. has an allocation
James holds a two-stock portfolio that invests in the stocks of Dusenburg Group Inc. and Rouster and Sideways Corp. Dusenburg Group Inc. has an allocation of 75% in James's portfolio. Each stock's expected return for the next year will depend on the market condition. The expected returns from the stocks in different market conditions are given in the following table: Market Condition Probability Dusenburg Group Inc. Rouster and Sideways Corp. Strong 0.25 10% 14% Norma 0.45 6% 8% Weak 0.30 8% 10% Using the information just given, calculate the expected rate of return on the individual stocks in James's portfolio and the expected rate of retur n on the entire portfolio over the next year The expected rate of return on Dusenburg Group Inc.'s stock over the next year is The expected rate of return on Rouster and sideways Corp.'s stock over the next year is r The expected rate of retur on James's portfolio over the next year s The expected returns just given were calculated based on three possible conditions in the market. These conditions 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. The continuous probability distributions of rates of return on stocks of two different companies-Company A and Company B-are shown on the following graph
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