Answer:
The expected return is 10.95%
Explanation:
CALCULATE THE EXPECTED RETURN OF X
State _____Probability __X_____Expected return
Boom ____ 0.25 ______22% ___5.50%
Normal ___ 0.60 ______15% ___ 9.00%
Recession _0.15 _______5% ___ <u>0.75% </u>
Total ______________________<u>15.25%</u>
CALCULATE THE EXPECTED RETURN OF Y
State _____Probability __Y_____Expected return
Boom ____ 0.25 ______10% ___ 2.50%
Normal ___ 0.60 ______9% ____5.40%
Recession _0.15 _______8% ___ <u>1.20% </u>
Total ______________________<u>9.10%</u>
Now calculate the weighted average return based on investment in each portfolio
Expected return = ( Expected return of Assets X x Weight of Asset X ) + ( Expected return of Assets Y x Weight of Asset Y )
Expected return = ( 15.25% x $3000/$10000 ) + ( 9.10% x $7000/$10000 )
Expected return = 4.575% + 6.370%
Expected return = 10.945%
Expected return = 10.95%
