Question

Consider the following information:

State of Economy	Probability of State of Economy			Portfolio Return If State Occurs
Recession		.20		?	.16
Normal		.45			.17
Boom		.35			.25

  

Calculate the expected return. (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)

  

Expected return

%

Answer 1

State of Economy	Probability	Return	Prob.*return
Recession	0.20	-0.16	-0.032
Normal	0.45	0.17	0.0765
Boom	0.35	0.25	0.0875
Total expected return			0.1320
Expected return=.2*-.16+.45*.17+.35*.25			0.1320	or	13.20%
Expected Return=13.20%