Question

You are considering two stocks A and B for your portfolio. Your economic analysis suggests that there is a 25% chance of an "economic boom", 50% chance of "normalcy" and a 25% chance of a "recession". Given the three "States of the Economy" and the above "probabilities", you expect that Stock A will provide a return of 20% during "economic boom", a return of 10% during "normalcy" and a return of 0% during "recession". Stock B on the other hand is expected to provide a return of 5% during "economic boom", a return of 10% during "normalcy" and a return of 15% during "recession". For a portfolio where 40% is invested in Stock A and 60% in Stock B, the expected rate of return is:

Answer 1

Answer:

The expected rate of return is = 10%

Workings: