Question

Calculating Expected Return [LO1] Based on the following information, calculate the expected return:

State of Economy Probability of State Occurring Portfolio Return if State Occurs
a) Recession 0.10 60
b) Normal 0.60 80
c) Boom 0.27 130

Answer 1

To calculate the expected return, multiply the probability of each state occurring by the corresponding portfolio return and then add up the results. The expected return for this portfolio is 89.1.

Step-by-step explanation:

To calculate the expected return, you multiply the probability of each state occurring by the corresponding portfolio return and then add up the results. In this case:

1. For the Recession state, the expected return would be 0.10 * 60 = 6.
2. For the Normal state, the expected return would be 0.60 * 80 = 48.
3. For the Boom state, the expected return would be 0.27 * 130 = 35.1.

Adding up the expected returns for each state gives you a total expected return of 6 + 48 + 35.1 = 89.1. Therefore, the expected return for this portfolio is 89.1.