Question

Your portfolio is invested 26 percent each in a and c, and 48 percent in

b. what is the expected return of the portfolio? (do not round intermediate calculaitons. enter your answer as a percent rounded to 2 decimal places,
e.g., 32.16.)

Answer 1

This portfolio does not have an equal weight in each asset. We first need to find the return of the portfolio in each state of the economy. To do this, we will multiply the return of each asset by its portfolio weight and then sum the products to get the portfolio return in each state of the economy. Doing so, we get:
Boom: Rp =.20(.27) + .60(.41) + .20(.28) = .3560 or 35.60%
Good: Rp = .20(.08) + .60(.16) + .20(.11) = 0.1340 or 13.40%
Poor: Rp = .20(-.01) + .60(.10) + .20(.02) = .0620 or 6.20%
Bust: Rp = .20(-.07) + .60(-.03) + .20(-4.98) = -1.0280 or -102.80%
And the expected return of the portfolio is:
E(Rp) = .20(.3560) + .40(.1340) + .16(.0620) + .24(-1.0280) = -.1120 or -11.20%