What is the expected return on a portfolio which is invested 20% in stock A, 50% in stock B, and 30% in stock C?
$\begin{array}{llcc}
\text { State of } & \text { Probability of } & \underline{\text { Returns if State Occurs }} \
\underline{ \text { Economy }} & \underline{\text { State of Economy }} & \underline{\text {Stock A\quad Stock B\quad Stock C}} \
\text {Boom } & 20\% &18\% \quad \quad 9\%\quad \quad 6\%\
\text { Normal} & 70\%& 11\%\quad \quad 7\%\quad \quad 9\%\
\text { Recession } & 10\%&-10\%\quad \quad 4\%\quad \quad 13\% \

\end{array}$

A)7.40%
B)8.25%
C)8.33%
D)9.45%
E)9.50%

Question

What is the expected return on a portfolio which is invested 20% in stock A, 50% in stock B, and 30% in stock C? 
$\begin{array}{llcc}
  \text { State of } & \text { Probability of } & \underline{\text { Returns if State Occurs }}  \
\underline{ \text { Economy }} & \underline{\text { State of Economy }} & \underline{\text {Stock A\quad  Stock B\quad  Stock C}} \
 \text {Boom  } &  20\%  &18\% \quad \quad 9\%\quad \quad 6\%\
 \text {  Normal} & 70\%& 11\%\quad \quad 7\%\quad \quad 9\%\
 \text { Recession  } & 10\%&-10\%\quad \quad 4\%\quad \quad 13\% \

\end{array}$

A)7.40%
B)8.25%
C)8.33%
D)9.45%
E)9.50%

Quizplus · Accepted Answer

The expected return is calculated by multiplying the probability of each state by the weighted average return of the stocks in that state, and then summing these products. The calculation is: (0.2 * (0.2*18% + 0.5*9% + 0.3*6%)) + (0.7 * (0.2*11% + 0.5*7% + 0.3*9%)) + (0.1 * (0.2*(-10%) + 0.5*4% + 0.3*13%)) = 8.25%.

What Is the Expected Return on a Portfolio Which Is