What is the expected return on a portfolio comprised of $4,000 in stock M and $6,000 in stock N if the economy enjoys a boom period?
$\begin{array}{llcc}
\text { State of } & \text { Probability of } & \underline{\text { Returns if State Occurs }} \
\underline{ \text { Economy }} & \underline{\text { State of Economy }} & \underline{\text {StockM\quad Stock N}} \
\text {Boom } & 10\% &18\% \quad \quad 10\%\
\text { Normal} & 75\%& 7\%\quad \quad8\%\
\text { Recession }&15\%&-20\%\quad \quad6\%\
\end{array}$
A)6.4%
B)6.8%
C)10.4%
D)13.2%
E)14.0%

Question

What is the expected return on a portfolio comprised of $4,000 in stock M and $6,000 in stock N if the economy enjoys a boom period? 
$\begin{array}{llcc}
  \text { State of } & \text { Probability of } & \underline{\text { Returns if State Occurs }}  \
\underline{ \text { Economy }} & \underline{\text { State of Economy }} & \underline{\text {StockM\quad  Stock N}} \
 \text {Boom  } & 10\%  &18\% \quad \quad 10\%\
 \text {  Normal} & 75\%& 7\%\quad \quad8\%\
\text { Recession }&15\%&-20\%\quad \quad6\%\
\end{array}$
A)6.4%
B)6.8%
C)10.4%
D)13.2%
E)14.0%

Quizplus · Accepted Answer

The expected return during a boom is calculated by weighting the returns of each stock by their proportion in the portfolio. Stock M contributes 40% (4000/10000) and Stock N contributes 60% (6000/10000). The return is (0.4 * 18%) + (0.6 * 10%) = 7.2% + 6% = 13.2%.

What Is the Expected Return on a Portfolio Comprised of $4,000