Question

Consider a portfolio with $2,636 invested in Asset A and $5,557 invested in Asset B with the following returns and probabilities. What is the rate of return on the portfolio pay when a LOSS occurs? (round the the nearest whole percentage ##%, include a negative sign if appropriate) State Probability Asset A Asset B WIN 0.7 15% 29% TIE 9% 10% LOSS 0.1 -13% -15% 0.2

Answer 1

When the loss occurs, A gives return of -13% and B gives return of -15%

Total Investment = 2636 + 5557 = 8193

Weight of A = 2636 / 8193 = 32.17%

Weight of B = 5557 / 8193 = 67.83%

Return given will be = Return of A * Weight of A + Return of B * Weight of B

= (-13%) * 0.3217 + (-15%) * 0.6783

= -15.36%