Suppose Caroline owns a two-stock portfolio that invests in Celestial Crane Cosmetics Company (CCC) and Lumbering Ox Truckmakers (LOT). Three-quarters of Caroline’s portfolio value consists of Celestial Crane Cosmetics’s shares, and the remaining balance consists of Lumbering Ox Truckmakers’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:
Market Condition
Probability of
Expected Returns
Occurrence
CCC
LOT
Strong 20% 20% 28%
Normal 35% 12% 16%
Weak 45% -16% -20%
Calculate the expected returns for the individual stocks in Caroline’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 1.00% .
• The expected rate of return on Lumbering Ox Truckmakers’s stock over the next year is 2.20% .
• The expected rate of return on Caroline’s portfolio over the next year is .