You have a portfolio which is comprised of 60% of Stock A and 40% of Stock B. What is the expected rate of return on this portfolio?
$\begin{array}{lrrr}
\text {State}&\text {Prob}&\text {A}&\text {B}\
\text { Boom } & .20 & 15 \% & 9\% \
\text { Normal } & .80 & 8 \% & 20\%
\end{array}$
A)12.76%
B)12.88%
C)13.44%
D)13.56%
E)13.85%

Question

Quizplus · Accepted Answer

The expected rate of return on the portfolio is the weighted average of the expected rates of return on the individual stocks. The expected rate of return on Stock A is 0.20 * 15% + 0.80 * 8% = 10.4%. The expected rate of return on Stock B is 0.20 * 9% + 0.80 * 20% = 16.8%. The expected rate of return on the portfolio is 0.60 * 10.4% + 0.40 * 16.8% = 12.76%.

You Have a Portfolio Which Is Comprised of 60% of Stock