Question

		Security Returns if State Occurs
State of Economy	Probability of State of Economy	Roll		Ross
Bust	0.40	−10	%	21	%
Boom	0.60	28		8

Calculate the expected return on a portfolio of 55 percent Roll and 45 percent Ross by filling in the following table: (A negative value should be indicated by a minus sign. Do not round intermediate calculations. Enter your answers as a percent rounded to 2 decimal places.)

Answer 1

Expected return on portfolio			12.98%
Working:
# 1	Expected return of "Roll"
	State of economy	Probability of state of economy	Security return if state occurs
		a	b	c=a*b
	Bust	0.40	-10%	-4.00%
	Boom	0.60	28%	16.80%
	Total			12.80%
# 2	Expected return of "Ross"
	State of economy	Probability of state of economy	Security return if state occurs
		a	b	c=a*b
	Bust	0.40	21%	8.40%
	Boom	0.60	8%	4.80%
	Total			13.20%
# 3	Expected return on portfolio:
			Weight	return
			a	b	c=a*b
	Roll		0.55	12.80%	7.04%
	Ross		0.45	13.20%	5.94%
	Total				12.98%