Question

QUESTION 21 State P(S) Return A Return B Recession 0.3 OX Normal 0.4 13% Boom 0.3 27% What is the expected return of a portfolio that is composed of 604 in Asset A and the rest in Asset 17 (Enter your answer as a whole number of the percentage rounded to two decimal places without the percentage sign. For example, for 0.995 enter 9.95: for 7.397 enter 7.40) V

Answer 1

Answer :

Calculation Of Expected Return of Portfolio

Expected Return of Portfolio = (Expected Return of A * Weight of A) + (Expected Return of B * Weight of B)

Calculation of Expected Return of A

State	Probability	Return	Return * Probability
Recession	0.3	-11%	-3.3%
Normal	0.4	13%	5.2%
Boom	0.3	27%	8.1%
		Expected Return	10%

Calculation of Expected Return of B

State	Probability	Return	Return * Probability
Recession	0.3	8%	2.4%
Normal	0.4	5%	2%
Boom	0.3	7%	2.1%
		Expected Return	6.5%

Given Weight of A = 60% or 0.60

Weight of B = 1 - 0.60 = 0.40

Expected Return of Portfolio = (10% * 0.60) + (6.5% * 0.40)

= 6% + 2.60%

= 8.60%