A portfolio consists of $18,740 of Stock K and $31,910 of Stock L.Stock K is expected to return 17 percent in a booming economy,lose 6 percent in a recession,and gain 9 percent in a normal economy.Stock L is expected to return 4 percent in a booming economy,13 percent in a recession,and 10 percent in a normal economy.The probability of the economy booming is 16 percent.What is the expected rate of return on the portfolio if the economy enters a recession?
A)-4.59%
B)-2.62%
C)5.97%
D)3.71%
E)0.74%

Question

Quizplus · Accepted Answer

Portfolio value = $18,740 + $31,910 = $50,650 Expected portfolio return_Recession = −0.06($18,740 / $50,650)+ 0.13($31,910 / $50,650)= 0.0597,or 5.97%

A Portfolio Consists of $18,740 of Stock K and $31,910