An investor has a portfolio with 30% invested in gold stocks, and 70% in industrial stocks. It is expected that gold stocks will provide a 4% return in a good economy and 18% in a poor economy.
Industrial stocks are expected to provide 9% return in a good economy and -9% in a poor economy.
The probability of a good economy is 40% and 60% in a poor economy. Given this information,
Calculate the expected return on the portfolio.

Question

Quizplus · Accepted Answer

The expected return on the portfolio can be calculated using the following formula:

Expected Return = (Weight of Gold Stocks x Expected Return on Gold Stocks) + (Weight of Industrial Stocks x Expected Return on Industrial Stocks)

= (0.3 x 0.04 x 0.4) + (0.3 x 0.18 x 0.6) + (0.7 x 0.09 x 0.4) + (0.7 x -0.09 x 0.6)

= 0.0048 + 0.0324 + 0.0252 - 0.0378

= 0.0246 or 2.46%

Therefore, the best choice is option B.

An Investor Has a Portfolio with 30% Invested in Gold