You own a portfolio with the following expected returns given the various states of the economy.What is the overall portfolio expected return? $$\begin{array} { l c c }
\begin{array} { l }
\text { State of } \
\underline{\text { Economy }}
\end{array} & \begin{array} { l }
\text { Probability of } \
\underline{\text { State of Economy }}
\end{array} & \begin{array} { c }
\text { Rate of Return } \
\underline{\text { if State Occurs }}
\end{array} \
\text { Boom } & 15 \% & 18 \% \
\text { Normal } & 60 \% & 11 \% \
\text { Recession } & 25 \% & - 10 \%
\end{array}$$
A)6.3%
B)6.8%
C)7.6%
D)10.0%
E)10.8%

Question

You own a portfolio with the following expected returns given the various states of the economy.What is the overall portfolio expected return? $$\begin{array} { l c c } 
\begin{array} { l } 
\text { State of } \
\underline{\text { Economy }}
\end{array} & \begin{array} { l } 
\text { Probability of } \
\underline{\text { State of Economy }}
\end{array} & \begin{array} { c } 
\text { Rate of Return } \
\underline{\text { if State Occurs }}
\end{array} \
 \text { Boom } & 15 \% & 18 \% \
\text { Normal } & 60 \% & 11 \% \
\text { Recession } & 25 \% & - 10 \%
\end{array}$$
A)6.3%
B)6.8%
C)7.6%
D)10.0%
E)10.8%

Quizplus · Accepted Answer

To find the overall portfolio expected return, we need to multiply the rate of return by the probability of occurrence for each state and then add them up. 
Overall portfolio expected return = (0.15 x 0.18) + (0.60 x 0.11) + (0.25 x (-0.10)) = 0.027 + 0.066 - 0.025 = 0.068 or 6.8%. Therefore, the answer is B.

You Own a Portfolio with the Following Expected Returns Given