Question

Consider the following information on returns and probabilities: Invest 1/2 of your money in Asset A and 1/2 in Asset B. State Probability A B Boom .25 12% 4% Bust .75 6% 18% What is the expected return for the portfolio

Answer 1

Answer: 11%

Step-by-step explanation:

Find the expected return in both Booms and Busts;

0.5 of your money is in Asset A and Asset B each.

Boom;

= (0.50 * 12%) + (0.50 * 4%)

= 8%

Bust

= (0.50 * 6%) + (0.50 * 18%)

= 12%

Portfolio expected return = (0.25 * 8%) + (0.75 * 12%)

= 11%