What is the expected return on a portfolio comprised of $3,000 in stock K and $5,000 in stock L if the economy is normal?
$\begin{array}{llcc}
\text { State of } & \text { Probability of } & \underline{\text { Returns if State Occurs }} \
\underline{ \text { Economy }} & \underline{\text { State of Economy }} & \underline{\text {Stock K\quad Stock L}} \
\text {Boom } & 20\% &14\% \quad \quad 10\%\
\text { Normal} & 80\%& 5\%\quad \quad6\%\

\end{array}$
A)3.75%
B)5.25%
C)5.63%
D)5.88%
E)6.80%

Question

What is the expected return on a portfolio comprised of $3,000 in stock K and $5,000 in stock L if the economy is normal? 
$\begin{array}{llcc}
  \text { State of } & \text { Probability of } & \underline{\text { Returns if State Occurs }}  \
\underline{ \text { Economy }} & \underline{\text { State of Economy }} & \underline{\text {Stock K\quad  Stock L}} \
 \text {Boom  } &  20\%  &14\% \quad \quad 10\%\
 \text {  Normal} & 80\%& 5\%\quad \quad6\%\

\end{array}$
A)3.75%
B)5.25%
C)5.63%
D)5.88%
E)6.80%

Quizplus · Accepted Answer

The expected return on a portfolio is the weighted average of the expected returns on the individual assets in the portfolio. The weights are the proportions of the portfolio invested in each asset. In this case, the portfolio is invested 3/8 in stock K and 5/8 in stock L. The expected return on stock K is 5% and the expected return on stock L is 6%. Therefore, the expected return on the portfolio is:(3/8) * 5% + (5/8) * 6% = 5.63%

What Is the Expected Return on a Portfolio Comprised of $3,000