Security Returns If State Occurs State of Probability of Economy State of Econom
ID: 2760428 • Letter: S
Question
Security Returns If State Occurs State of Probability of Economy State of Economy Roll Ross Bust .30 -11 % 12 % Boom .70 29 5 Calculate the expected return on a portfolio of 50 percent Roll and 50 percent Ross by filling in the following table: (Negative values should be indicated by a minus sign. Do not round intermediate calculations. Enter your answers as a percent rounded to 2 decimal places. Omit the "%" sign in your response.) State of Economy Probability of State of Economy Portfolio Return If State Occurs Product Bust .30% % Boom .70% % E(RP) = %Explanation / Answer
Given in the problem
State of economy the probability of roll /ross in bust is .30 is 11% / 12%
State of economy the probability of roll /ross in boom is .70 is 29% / 5%
To calculate the expected return on a portfolio of 50 percent Roll and 50 percent
Calculation of return in bust , given
Bust = 0.30
Portfolio return = .50(-0.11)+.50(0.12)
= -0.055 + 0.06
=0.005
Calculation of return in boom , given
Boom = 0.70
Portfolio return = .50(0.29)+.50(0.05)
= 0.145 + 0.025
=0.1700
Calculation of E(RP)
= (0.30 * 0.005) + (0.70*0.1700)
=0.0015+0.119
=0.1205
Or 12.05%
The E(RP) is 12.05%