As part of an investment team at a large Canadian investment company, you are analyzing the returns of two stocks: TD bank and Sobey. You consider five possible scenarios for the stocks’ returns depending on how good the economy will be over the coming year. TD bank has a 0.9 correlation with the market portfolio. Sobey has a -0.5 correlation with the market portfolio. The market portfolio has a standard deviation of 10%. The risk free rate is equal to 4%.

Economy scenario	Probability	Return on TD bank stock	Return on Sobey stock
Boom	0.3	30%	8%
Above average	0.2	20%	8%
Average	0.2	10%	10%
Below average	0.2	0%	12%
Recession	0.1	-20%	15%

If TD bank stock is correctly priced today, then what is the expected return on the market portfolio?

Answer rating: 100% (QA)

Economy scenario Probability Return on TD bank stock Expec... View the full answer