Question

Given the following end of year prices and states of the economy. Combine the following assets to form a portfolio with zero risk. What is the expected return of your portfolio? Enter your answer as a percent. Do not include the % sign. Round your final answer to two decimals.

	Probability	.25	.50
	Price today	Expansion	Recession
AAA	100	130	110
BBB	50	55	65

Answer 1

The solution is as follows:

State of Expected Retem (1) Probability xibi Economy AAA BBB Total (pi) Expansion 30 10 40 0.25 1 10 Recession to 30 40 0.50 | 20 Normal 0 o 0 0.25 o | (Note] Saipix 30 Note: Poobabilities must always add to 1. Here, 1-(0.2510.38). 0.25 which is assumed to be normal state of economy boobability. Since, the pootfolio is with Zerorisk thuss negative returns is not possible. Thus, we assume no capital depreciation or that portfolio will fetch zero reterrn. .' The expected Return of Yowe Portfolio is 30% .