David owns a two-stock portfolio that invests in Falcon Freight Company (FF) and Pheasant Pharmaceuticals (PP). Three-quarters of David’s portfolio value consists of FF’s shares, and the balance consists of PP’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 ConditionProbability of OccurrenceFalcon FreightPheasant PharmaceuticalsStrong0.5010%14%Normal0.256%8%Weak0.25-8%-10% Calculate expected returns for the individual stocks in David’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 Falcon Freight’s stock over the next year is .•The expected rate of return on Pheasant Pharmaceuticals’s stock over the next year is .•The expected rate of return on David’s portfolio over the next year is

Expected rate = Sum of [ Probability * Expected return ]

Answered: David owns a two-stock portfolio that…

Intermediate Financial Management (MindTap Course List)

13th Edition

ISBN:9781337395083

Author:Eugene F. Brigham, Phillip R. Daves

Publisher:Eugene F. Brigham, Phillip R. Daves

Chapter8: Basic Stock Valuation

Section: Chapter Questions

Problem 2Q: Two investors are evaluating General Electric’s stock for possible purchase. They agree on the...

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David owns a two-stock portfolio that invests in Falcon Freight Company (FF) and Pheasant Pharmaceuticals (PP). Three-quarters of David’s portfolio value consists of FF’s shares, and the balance consists of PP’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 Occurrence	Falcon Freight	Pheasant Pharmaceuticals
Strong	0.50	10%	14%
Normal	0.25	6%	8%
Weak	0.25	-8%	-10%

Calculate expected returns for the individual stocks in David’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 Falcon Freight’s stock over the next year is .
•	The expected rate of return on Pheasant Pharmaceuticals’s stock over the next year is .
•	The expected rate of return on David’s portfolio over the next year is

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