Question: 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

  1. Rons friend, Bruce Wallace, has advised Ron that he should diversify his portfolio by investing in both stocks (for a portfolio of Pulp-Fiction).

  1. Would you agree with Bruce that diversification is important? Explain why (2-3 sentences).

  1. 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.

  1. Calculate expected return for each state of the economy for Rons Pulp-Fiction portfolio according to your weights above. Refer to the format below.
  2. 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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