# Q2 MINI CASES CF.docx - MINI CASES Question 2 A WS = amount...

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MINI CASES Question 2 A) WS = amount invested in stock S WT = amount invested in stock T RSb = return of stock S during boom RTb = return of stock T during boom RSn = return of stock S during normal period RTn = return of stock T during normal period RSr = return of stock S during recession period RTr = return of stock T during recession period E(r) boom = (WS/WS+WT)*RSb + (WT/WS+WT)*RTb = [4,500 / (4,500 + 3,000)* 0.12)] + [3,000 / (4,500+3,000)* 0.04) = 0.072 + 0.016 = 0.088 E(r) normal = (WS/WS+WT)*RSn + (WT/WS+WT)*RTn = [4,500 / (4,5000 + 3000) *0.09)] + [3,000 / (4,500 + 3,000) *0.06) = 0.054 + 0.024 = 0.078 E(r) recession = (WS/WS+WT)*RSr + (WT/WS+WT)*RTr =[4,500 / (4,500 + 3,000) * 0.25)] + [3,000 / (4,500 + 3,000) *0.09) = 0.15+0.036 = 0.186 E(r) portfolio = P boom * E(r) boom + P normal + E(r) normal + P recession * E(r) recession. = (0.10 *0.088) + (0.65 *0.078) + (0.25 *0.186) = 0.0088+0.0507+0.0465 = 0.106

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