Question

		Security Returns if State Occurs
State of Economy	Probability of State of Economy	Roll		Ross
Bust	0.20	−13	%	17	%
Boom	0.80	24		6

Calculate the expected return on a portfolio of 60 percent Roll and 40 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.)

Answer 1

Step-1:Calculation of expected return of individual security
	Expected return of Security "Roll"				=	(-13%*0.20)+(24%*0.80)
					=	16.60%
	Expected return of Security "Ross"				=	(17%*0.20)+(6%*0.80)
					=	8.20%
Step-2:Calculation of expected return of portfolio
	Expected return of portfolio				=	(16.60%*0.60)+(8.20%*0.40)
					=	13.24%