Question

You have a portfolio which is comprised of 70 percent of stock A and 30 percent of stock B. What is the expected return on this portfolio? State of the Economy Probability E(R) A E(R) B Weight 60 % 40 % Boom 0.2 20 % 15 % Normal 0.6 12 % 8 % Recession 0.2 -10 % 3 % Group of

answer choices

8.03 percent

8.88 percent

7.58 percent

9.40 percent

7.30 percent

Answer 1

Expected Returns of A, Ra = 0.2 x 20% + 0.6 x 12% + 0.2 x -10% = 9.20%

Expected Returns of B, Rb = 0.2 x 15% + 0.6 x 8% + 0.2 x 3% = 8.40%

Portfolio Returns = 60% x 9.20% + 40% x 8.40% = 8.88%