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Unformatted text preview: E120 Principles of Engineering Economics Fall 2010 Problem Set #7 Solutions 1. The return of any asset is the increase in price, plus any dividends or cash flows, all divided by the initial price. The return of this stock is: R = [($102 91) + 2.40] / $91 = .1473 or 14.73% 2. The expected return of a portfolio is the sum of the weight of each asset times the expected return of each asset. So, the expected return of the portfolio is: E(R p ) = .60(.09) + .25(.17) + .15(.13) = .1160 or 11.60%. 3. The expected return of an asset is the sum of the probability of each return occurring times the probability of that return occurring. So, the expected return of the asset is: E(R) = .20(.05) + .50(.12) + .30(.25) = .1250 or 12.50% 4. a . This portfolio does not have an equal weight in each asset. We first need to find the return of the portfolio in each state of the economy. To do this, we will multiply the return of each asset by its portfolio weight and then sum the products to get the portfolio...
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- Fall '08