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Calculate the expected return of asset

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Question - Assume the market can have five possible states: very good, good, neutral, bad and very bad. The probabilities for each of the states are given in the table below, and so are the returns of two assets, Asset 1 and Asset 2 for each of these states:

State

Probability

Asset 1 Returns

Asset 2 Returns

Very Good

0.1

14%

8%

Good

0.2

8%

5%

Neutral

0.4

2%

2%

Bad

0.2

-4%

-4%

Very Bad

0.1

-10%

-8%

Required - Calculate the expected return of Asset 1 and Asset 2.

Using the two assets, how could you construct a portfolio with expected return of 1.7%?

Reference no: EM133170506

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