Question

Consider the following information: Probability of State of State of Portfolio Return if State Occurs Economy Economy Recession 10 - 15 Normal 60 09 Boom 30 .23 Calculate the expected return. (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) Expected return %

Answer 1

Solution:
	Expected return         10.80   %
Working Notes:
	Expected return of portfolio(Er)
	= Sum of ((prob of each state) x (Return of portfolio at each state))
	=0.10 x (-.15) + 0.60 x (.09) + 0.30 x (0.23)
	=0.108
	=10.80%
Notes:	Expected return of portfolio is the sum of product of probability of each sate of economy and corresponding returns of each state of economy.
	Expected return of portfolio shows the overall return from the portfolio by considering the effect of all the state of economy.
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