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Rons friend, Bruce Wallace, has advised Ron that he should diversify his portfolio by investing in both stocks (for a portfolio of Pulp-Fiction). Would you
- Rons friend, Bruce Wallace, has advised Ron that he should diversify his portfolio by investing in both stocks (for a portfolio of Pulp-Fiction).
- Would you agree with Bruce that diversification is important? Explain why (2-3 sentences).
- Ron has $100,000 that he can invest. If he were to invest $70,000 in Pulp and $30,000 in Fiction determine the weights for each stock in his portfolio.
- Calculate expected return for each state of the economy for Rons Pulp-Fiction portfolio according to your weights above. Refer to the format below.
- Considering Rons expected probabilities for each state of the economy, calculate expected return for Rons portfolio.
Rate of Return if State Occurs | ||||
State of Economy | Probability of State of Economy | Pulp | Fiction | Portfolio Pulp-Fiction |
Recession | 0.40 | 35.50% | 22.40% | ? |
Normal | 0.35 | 10.30% | 8.50% | ? |
Boom | 0.25 | -12.70% | -4.20% | ? |
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