What is the expected return on a portfolio which is invested 20% in stock A and

Question

What is the expected return on a portfolio which is invested 20% in stock A and 80% in stock B?

            State of             Probability of                Returns if State Occurs

            Economy          State of Economy               Stock A    Stock B   

               Boom                    20%                             18%                  9%         

               Normal                  70%                             11%                  7%         

Recession                 10%                            -10%                  4%      

Answer is 7.74%, please show work outside of excel!! or please list the formulas used so I can understand it

Explanation / Answer

Expected return for A=Respective returns*respective probabilities

=(0.2*18)+(0.7*11)+(0.10*-10)=10.3%

Expected return for B=(0.2*9)+(0.7*7)+(0.1*4)=7.1%

Hence expected return of portfolio=(10.3*0.2)+(7.1*0.8)

=7.74%

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