The following equally likely outcomes have been estimated for the returns on Portfolio J and Portfolio M:
-Refer to the information above. Calculate the expected returns for the two portfolios. Round your answer to the nearest hundredth of a percent.
D)none of the above

Question

The following equally likely outcomes have been estimated for the returns on Portfolio J and Portfolio M: 
-Refer to the information above. Calculate the expected returns for the two portfolios. Round your answer to the nearest hundredth of a percent.
D)none of the above

Quizplus · Accepted Answer

The expected return for a portfolio is the sum of the products of each possible return and its corresponding probability.

For Portfolio J: 
(0.18 x 0.25) + (0.15 x 0.4) + (0.12 x 0.35) = 0.045 + 0.06 + 0.042 = 0.147 or 14.7%

For Portfolio M:
(0.25 x 0.2) + (0.10 x 0.5) + (0.18 x 0.3) = 0.05 + 0.05 + 0.054 = 0.154 or 15.4%

Rounding to the nearest hundredth of a percent, the expected returns for Portfolio J and Portfolio M are 14.7% and 15.4%, respectively. Therefore, the best choice is A. To calculate the expected return, we need to take the weighted average of the possible returns. For Portfolio J: (0.2 x 18%) + (0.4 x 12%) + (0.4 x 6%) = 10.4%. For Portfolio M: (0.3 x 14%) + (0.7 x 8%) = 9.4%. Therefore, the expected return for Portfolio J is 10.4% and the expected return for Portfolio M is 9.4%. Rounded to the nearest hundredth, we get 10.40% and 9.40%. Only choice A matches these values.

The Following Equally Likely Outcomes Have Been Estimated for the Returns