What is the expected return on a portfolio that is invested 22 percent in Stock A, 36 percent in Stock B, and the remainder in Stock C? $$\begin{array} { l ccccc }
{ \text { State of } } & { \text { Probability of } } &&\text { Rate of Return }\
\text { Economy } & \text { State of Economy } & &{ \text { if State Occurs } } \
& & \text { Stock A } & \text { Stock B } & \text { Stock C } \
\text { Boom } & .05 & .18 & .11 & .13 \
\text { Normal } & .92 & .09& .08 & .06 \
\text { Bust } &.03& - .07& - .05 & -.14
\end{array}$$
A) 7.06 percent
B) 7.38 percent
C) 6.99 percent
D) 7.29 percent
E) 6.84 percent

Question

What is the expected return on a portfolio that is invested 22 percent in Stock A, 36 percent in Stock B, and the remainder in Stock C? $$\begin{array} { l ccccc } 
 { \text { State of } } &   { \text { Probability of } } &&\text { Rate of Return }\
\text { Economy } & \text { State of Economy } &  &{ \text { if State Occurs } } \
& & \text { Stock A } & \text { Stock B } & \text { Stock C } \
\text { Boom } & .05 & .18 & .11 & .13 \
\text { Normal } & .92 & .09& .08 & .06 \
\text { Bust } &.03& - .07& - .05 & -.14
\end{array}$$
A) 7.06 percent
B) 7.38 percent
C) 6.99 percent
D) 7.29 percent
E) 6.84 percent

Quizplus · Accepted Answer

The expected return on a portfolio is the weighted average of the expected returns on the individual assets in the portfolio. The weights are the proportions of the portfolio invested in each asset. In this case, the portfolio is invested 22 percent in Stock A, 36 percent in Stock B, and the remainder (42 percent) in Stock C.The expected return on Stock A is 0.05 * 0.18 + 0.92 * 0.09 + 0.03 * (-0.07) = 0.0936.The expected return on Stock B is 0.05 * 0.11 + 0.92 * 0.08 + 0.03 * (-0.05) = 0.0824.The expected return on Stock C is 0.05 * 0.13 + 0.92 * 0.06 + 0.03 * (-0.14) = 0.0684.The expected return on the portfolio is 0.22 * 0.0936 + 0.36 * 0.0824 + 0.42 * 0.0684 = 0.0729, or 7.29 percent.

What Is the Expected Return on a Portfolio That Is