Ethan owns a two-stock portfolio that invests in Celestial Crane Cosmetics Company (CCC) and Lumbering Ox Truckmakers (LOT). Three-quarters of Ethan's portfolio value consists of CCC's shares, and the balance consists of LOT'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:

Calculate expected returns for the individual stocks in Ethan'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 Celestial Crane Cosmetics's stock over the next year is

? The expected rate of return on Lumbering Ox Truckmakers's stock over the next year is

? The expected rate of return on Ethan's portfolio over the next year is

The expected returns for Ethan'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.

Transcribed Image Text:

Market Condition Probability of Occurrence Celestial Crane Cosmetics Lumbering Ox Truckmakers 20% 10% 14% 35% 6% 8% 45% -8% -10% Strong Normal Weak Market Condition Probability of Occurrence Celestial Crane Cosmetics Lumbering Ox Truckmakers 20% 10% 14% 35% 6% 8% 45% -8% -10% Strong Normal Weak

Answer rating: 100% (QA)

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