Homework Answers
Answer :
Calculation Of Expected Return of Portfolio
Expected Return of Portfolio = (Expected Return of A * Weight of A) + (Expected Return of B * Weight of B)
Calculation of Expected Return of A
| State | Probability | Return | Return * Probability |
| Recession | 0.3 | -11% | -3.3% |
| Normal | 0.4 | 13% | 5.2% |
| Boom | 0.3 | 27% | 8.1% |
| Expected Return | 10% |
Calculation of Expected Return of B
| State | Probability | Return | Return * Probability |
| Recession | 0.3 | 8% | 2.4% |
| Normal | 0.4 | 5% | 2% |
| Boom | 0.3 | 7% | 2.1% |
| Expected Return | 6.5% |
Given Weight of A = 60% or 0.60
Weight of B = 1 - 0.60 = 0.40
Expected Return of Portfolio = (10% * 0.60) + (6.5% * 0.40)
= 6% + 2.60%
= 8.60%
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