You Own a Portfolio with the Following Expected Returns Given

question 61

Multiple Choice

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%

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Definitions:

Contract Interest Rate

The interest rate specified within a financial contract, such as a loan or bond agreement, that determines the interest payments.

Paid-In Capital

Capital contributed to a corporation by the stockholders and others.

Common Stock

A form of corporate equity ownership, a type of security representing ownership in a corporation and a claim on part of the company’s profits.

Retained Earnings

Accumulated net income of a company that has not been distributed to shareholders as dividends.