You Have a Portfolio Which Is Comprised of 70% of Stock

question 15

Multiple Choice

You have a portfolio which is comprised of 70% of Stock A and 30% of Stock B. What is the expected return on this portfolio?
$\begin{array}{lrrr}\text { State of the Economy } & \text { Probability } & \text { E(R) }_{A}& \text { E(R) }_{B}\\\text { Weight } & &70 \% & 30 \% \\\\\text { Boom } & .2 & 20 \% & 14\% \\\text { Normal } & .6 & 12 \% & 8 \% \\\text { Recession } & .2 & -8 \% & 5\%\end{array}$

• A)9.30%
• B)9.58%
• C)10.03%
• D)11.79%
• E)12.40%

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Definitions:

Salvage Value

The estimated residual value of an asset at the end of its useful life.

Incremental Cost Approach

The incremental cost approach involves evaluating the additional costs and benefits associated with making one decision over another, used to make economically sound choices.

Payback Period

The length of time required for an investment to recover its initial cost out of the cash receipts that it generates.

Required Rate of Return

The minimum annual percentage earned by an investment that will entice individuals or companies to put money into a particular security or project.