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State Probability Return on A Return on B Boom .20 20% 5% Normal .50 10% 8% Bust .30 8% 12% What is the expected return of a portfolio with 80% of the funds invested in A? O 8.60% O 10.84% O 9.88% O 11.20% O 11.62%

State Probability Return on A Return on B Boom .20 20% 5% Normal .50 10% 8% Bust .30 8% 12% What is the expected return of a portfolio with 80% of the funds invested in A? O 8.60% O 10.84% O 9.88% O 11.20% O 11.62%

Essentials Of Investments
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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**Portfolio Expected Return Calculation** The table below outlines the returns on two investments, A and B, based on different economic states: Boom, Normal, and Bust. | State | Probability | Return on A | Return on B | |--------|-------------|-------------|-------------| | Boom | 0.20 | 20% | 5% | | Normal | 0.50 | 10% | 8% | | Bust | 0.30 | 8% | 12% | **Question**: What is the expected return of a portfolio with 80% of the funds invested in A? **Choices**: - 8.60% - 10.84% - 9.88% - 11.20% - 11.62% To find the expected return, calculate the weighted average return of both investments across the different states, considering the probability of each state and the allocation ratio between A and B (80% in A and 20% in B).
Transcribed Image Text:**Portfolio Expected Return Calculation** The table below outlines the returns on two investments, A and B, based on different economic states: Boom, Normal, and Bust. | State | Probability | Return on A | Return on B | |--------|-------------|-------------|-------------| | Boom | 0.20 | 20% | 5% | | Normal | 0.50 | 10% | 8% | | Bust | 0.30 | 8% | 12% | **Question**: What is the expected return of a portfolio with 80% of the funds invested in A? **Choices**: - 8.60% - 10.84% - 9.88% - 11.20% - 11.62% To find the expected return, calculate the weighted average return of both investments across the different states, considering the probability of each state and the allocation ratio between A and B (80% in A and 20% in B).
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