What is the expected return on a portfolio comprised of $€ 3,000$ in share K and $\in 5,000$ in share L if the economy is normal?
$\begin{array} { | l | l | l | l | }
\hline & & \text { Returns if State Occurs } \
\hline \text { State of Economy } & \text { Probability of State of Economy } & \text { Share K } & \text { Share L } \
\hline \text { Boom } & 20 \% & 14 \% & 10 \% \
\hline \text { Normal } & 80 \% & 5 \% & 6 \% \
\hline
\end{array}$
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 share K and $\in 5,000$ in share L if the economy is normal?
$\begin{array} { | l | l | l | l | } 
\hline & & \text { Returns if State Occurs } \
\hline \text { State of Economy } & \text { Probability of State of Economy } & \text { Share K } & \text { Share L } \
\hline \text { Boom } & 20 \% & 14 \% & 10 \% \
\hline \text { Normal } & 80 \% & 5 \% & 6 \% \
\hline
\end{array}$
A)3.75%
B)5.25%
C)5.63%
D)5.88%
E)6.80%

Quizplus · Accepted Answer

The expected return on the portfolio in a normal economy can be calculated using the weighted average of the returns of shares K and L based on their proportions in the portfolio. The total investment is $€ 3,000 + € 5,000 = € 8,000$. Share K's proportion is $€ 3,000 / € 8,000 = 0.375$ and share L's proportion is $€ 5,000 / € 8,000 = 0.625$. The expected return for the portfolio in a normal economy is $0.375 \times 5\% + 0.625 \times 6\% = 1.875\% + 3.75\% = 5.625\%$.

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