Question

There are two stocks in a portfolio and two possible states of economy that may occur. The relevant information is summarized as follows (the given information is the same as in the previous question): Stock return if a certain state of economy occurs State of Economy Probability Stock 1 Stock 2 Good 0.50 8% 15% Bad 0.50 4% -7% Initial Investments $6,000 $4,000 What is the expected return on this portfolio? OA) 10.4% O B) 3.6 C) 5.2% OD 8.8

Answer 1

Expected return=Respective return*Respective probability

Expected return for:

1=(0.5*8)+(0.5*4)=6%

2=(0.5*15)+(0.5*-7)=4%

Total investment=6000+4000=$10,000

Portfolio return=Respective return*Respective weight

=(6000/10,000*6)+(4000/10,000*4)

=5.2%