We calculate the expected return on a portfolio of 50 percent Roten and 50 percent Bradley as follows:
|
(1) |
(2) |
(3)1 |
(4) |
|
State of |
Probability of |
Portfolio Return if State Occurs |
Product |
|
Economy |
State of the |
(2) × (3) |
|
|
Economy |
|||
|
Bust |
0.4 |
10% |
0.04 |
|
Boom |
0.6 |
25% |
0.15 |
|
E(RP) = |
19% |