What is the expected return on a portfolio comprised of $9,750 of Stock X and $4,520 of Stock Y if the economy enjoys a boom period? $$\begin{array} { l c c }
{ \text { State of } } & \text { Probability of } & \text { Rate of Return } \
\text { Econony } & \text { State of Economy } & \text { if State Occurs } \
& &\begin{array}{ll}\text { Stock X } & \text { Stock Y }\end{array}\
\text { Boom } & .25& \begin{array}{ll}.108 & \quad \quad .156\end{array} \
\text { Normal } & .65 & \begin{array}{ll}.087 & \quad \quad.097\end{array} \
\text { Recession } & .10&\begin{array}{ll} .024 & \quad \quad -.069\end{array}
\end{array}$$
A) 11.93 percent
B) 11.67 percent
C) 12.55 percent
D) 12.78 percent
E) 12.32 percent

Question

What is the expected return on a portfolio comprised of $9,750 of Stock X and $4,520 of Stock Y if the economy enjoys a boom period? $$\begin{array} { l c c } 
 { \text { State of } } & \text { Probability of } & \text { Rate of Return } \
\text { Econony } & \text { State of Economy } & \text { if State Occurs } \
 &  &\begin{array}{ll}\text {   Stock X } & \text { Stock Y }\end{array}\
\text { Boom } & .25& \begin{array}{ll}.108 &  \quad  \quad .156\end{array} \
\text { Normal } & .65 & \begin{array}{ll}.087 &  \quad  \quad.097\end{array} \
\text { Recession } & .10&\begin{array}{ll} .024 &  \quad  \quad -.069\end{array}
\end{array}$$
A) 11.93 percent
B) 11.67 percent
C) 12.55 percent
D) 12.78 percent
E) 12.32 percent

Quizplus · Accepted Answer

The expected return during a boom is calculated by finding the weighted average return of the portfolio. The weights are based on the investment amounts in Stock X and Stock Y. The total investment is $9,750 + $4,520 = $14,270. The weight for Stock X is $9,750 / $14,270 and for Stock Y is $4,520 / $14,270. The expected return is then (weight of Stock X * return of Stock X in boom) + (weight of Stock Y * return of Stock Y in boom) = (0.6833 * 0.108) + (0.3167 * 0.156) = 0.074 + 0.0493 = 0.1233 or 12.32 percent.

What Is the Expected Return on a Portfolio Comprised of $9,750