Question

You have a portfolio which is comprised of 55 percent of stock A and 45 percent of stock B. What is the expected return on this portfolio?

State of the Economy	Probability	E(R) A		E(R) B
Weight		55	%	45	%
Boom	0.15	19	%	12	%
Normal	0.65	11	%	7	%
Recession	0.20	-16	%	1	%

Multiple Choice

• 7.14 percent

• 8.22 percent

• 7.60 percent

• 5.45 percent

• 6.69 percent

Answer 1

Answer: Option E:6.69 Percent

Expected Return =

For Stock A

Expected Return =0.15*19%+0.65*11%+0.2*-16%=6.8%

For Stock B

Expected Return =0.15*12%+0.65*7%+0.2*1%=6.55%

State of economy	Probability P	E(A)	E(B)
Boom	0.15	19%	12%
Normal	0.65	11%	7%
Recession	0.2	-16%	1%
Expected return		6.8%	6.55%

Expected return of portfolio = Expected return for stock A* Weight of stock A + Expected return for stock B* Weight of stock B

Expected return of portfolio = 6.8%*55%+6.55%*45%=6.69%