Question

		Security Returns if State Occurs
State of Economy	Probability of State of Economy	Roll		Ross
Bust	0.40	−16	%	17	%
Boom	0.60	16		7

Calculate the expected return on a portfolio of 65 percent Roll and 35 percent Ross by filling in the following table:(A negative value should be indicated by a minus sign. Do not round intermediate calculations. Enter your answers as a percent rounded to 2 decimal places.)

State of Economy	Probability of State of Economy	Portfolio Return if State Occurs		Product
Bust	0.40		__________%		_______%
Boom	0.60		__________%		________%
		E(RP)=			________%

Answer 1

Expected Rate of Return [E(R)] = Ʃ(Probability * Rate of Return)
State of Economy	Probability	Rate of Return	Expected Rate of Return
		Roll	Ross	Roll	Ross
Bust	0.40	-16%	17%	-6.40%	6.80%
Boom	0.60	16%	7%	9.60%	4.20%
				3.20%	11.00%
Expected Return of Roll = 3.20%
Expected Return of Ross = 11.00%
Expected Return on a Portfolio of 65% (0.65) Roll and 35% (0.35) Ross
= 0.65 * Expected Return of Roll + 0.35 * Expected Return of Ross
= 0.65 * 3.20% + 0.35 * 11.00%
=2.08 + 3.85
=5.93%