Question

What is the expected return of a portfolio with 75% in asset A and 25% in Asset B?

State of the economy Prob. of the state of economy Rate of return if states occurs

Boom 0.40 0.15 0.05
Bust 0.60 - 0.05 0.05

Answer 1

Answer: 3.5%

Explanation:

Expected return if there is a Boom:

= (0.75 * 0.15) + (0.25 * 0.05)

= 0.1250

Expected return if things go Bust:

= (0.75 * -0.05) + (0.25 * 0.05)

= -0.025

Expected return of Portfolio = ∑(Probability of market state * expected return of market state)

= (0.4 * 0.1250) + (0.6 * -0.025)

= 3.5%