Question

The following returns have been estimated for Security T and Security S:

Scenario	Security T	Security S
1	20%	10%
2	13%	-6%
3	15%	20%

Each scenario is equally likely to occur, and you plan to invest 70% in Security T and 30% in Security S. What is the expected return of the portfolio? Round your answer to the nearest tenth of a percent.

Group of answer choices

11.7%

12.0%

13.6%

14.0%

Answer 1

Expected Return of portfolio = Weight of S * Expected Return of S + Weight of T * Expected Return of T

Expected Return of S = Probability weighted average return of all scenarios. Since all three scenarios carry equal weight, this would be a normal average

Expected return of S= (10% + -6% + 20%)/3 = 8%

Expected return of T= (20% + 13% + 15%)/3 = 16%

Expected Return of portfolio = 30% * 8% + 70% * 16% = 2.4% + 11.2% = 13.6%