Question

Use the following table of states of the economy and stock returns to calculate the expected return on a portfolio of 50 percent Roten and the rest in Bradley.

		Security if State	Returns Occurs
	Prob of State of Economy	Roten	Bradley
Bust	0.3	-7%	31%
Boom	?	49	13

Answer 1

Expected return on a portfolio

25.30%

Working:

Step-1:Calculation of expected return of individual Stock
		Prob of State of Economy	Roten			Bradley
			Return	Expected Return		Return	Expected Return
		a	b	c=a*b		d	e=a*d
	Bust	0.30	-7%	-2.10%		31%	9.30%
	Boom	0.70	49%	34.30%		13%	9.10%
	Total	1.00		32.20%			18.40%
Step-2:Calculation of expected return on a portfolio
			Weight	Return	Weigted Return
		Roten	50%	32.20%	16.10%
		Bradley	50%	18.40%	9.20%
		Total			25.30%