You have a portfolio which is comprised of 70% of Stock A and 30% of Stock B. What is the expected return on this portfolio?
$\begin{array}{lrrr}
\text { State of the Economy } & \text { Probability } & \text { E(R)}_{A}& \text { E(R)}_{B}\
\text { Weight } & &70 \% & 30 \% \
\
\text { Boom } & .2 & 20 \% & 14\% \
\text { Normal } & .6 & 12 \% & 8 \% \
\text { Recession } & .2 & -8 \% & 5\%
\end{array}$

A)9.30%
B)9.58%
C)10.03%
D)11.79%
E)12.40%

Question

You have a portfolio which is comprised of 70% of Stock A and 30% of Stock B. What is the expected return on this portfolio?
$\begin{array}{lrrr}
\text { State of the Economy } & \text { Probability } & \text { E(R)}_{A}& \text {  E(R)}_{B}\
\text { Weight } & &70 \% & 30 \% \
\
\text { Boom } & .2 & 20 \% & 14\% \
\text { Normal } & .6 & 12 \% & 8 \% \
\text { Recession } & .2 & -8 \% & 5\%
\end{array}$

A)9.30%
B)9.58%
C)10.03%
D)11.79%
E)12.40%

Quizplus · Accepted Answer

The expected return on the portfolio is the weighted average of the expected returns on the individual stocks. The weight of Stock A is 70% and the weight of Stock B is 30%. The expected return on Stock A is 12% and the expected return on Stock B is 8%. Therefore, the expected return on the portfolio is (0.70 * 12%) + (0.30 * 8%) = 9.30%.

You Have a Portfolio Which Is Comprised of 70% of Stock