You own a portfolio with the following expected returns given the various states of the economy.What is the overall portfolio expected return?
$\begin{array}{|l|l|l|}
\hline \text { State of Economy } & \text { Probability of State of Economy } & \text { Rate of Return if StateOccurs } \
\hline \text { Boom } & 15 \% & 18 \% \
\hline \text { Normal } & 60 \% & 11 \% \
\hline \text { Recession } & 25 \% & -10 \% \
\hline
\end{array}$
A)6.3%
B)6.8%
C)7.6%
D)10.0%
E)10.8%

Question

Quizplus · Accepted Answer

To find the overall portfolio expected return, we need to multiply each rate of return by its respective probability of occurring and then add up the results.

For example, for the "Boom" state of the economy, the expected return is:

0.15 x 0.18 = 0.027

We can do this for all three states and then add the results:

0.027 + (0.60 x 0.11) + (0.25 x (-0.10)) = 0.068 or 6.8%

Therefore, the correct answer is B) 6.8%.

You Own a Portfolio with the Following Expected Returns Given