Question

What is the expected return on a portfolio that will decline in value by 13% in a recession, will increase by 16% in normal times, and will increase by 23% during boom times if each scenario has an equal likelihood of occurrence?

Answer 1

Answer:

Expected return of the portfolio = 8.67 %

Explanation:

given data

recession = - 13%

normal times = 16%

boom times = 23%

to find out

expected return on a portfolio

solution

we know that here 3 scenario has equal chance of happen probability it means each event have chance or probability of occur = $\frac{1}{3}$

so here Expected return of portfolio will be

Expected return of portfolio = Sum of all 3 events expected return  ............1

we get here

Expected return of the portfolio = $-0.13*\frac{1}{3} +0.16*\frac{1}{3}  +0.23*\frac{1}{3}$

Expected return of the portfolio = 0.0866666

Expected return of the portfolio = 8.67 %