A bank has two loans of equal size outstanding, A and B, and the bank has identified

Question:

A bank has two loans of equal size outstanding, A and B, and the bank has identified the returns they would earn in two different states of nature, 1 and 2, representing default and no default, respectively.

If the probability of state 1 is 0.2 and the probability of state 2 is 0.8, calculate:
a. The expected return of each security.
b. The expected return on the portfolio in each state.
c. The expected return on theportfolio.

Expected Return
The expected return is the profit or loss an investor anticipates on an investment that has known or anticipated rates of return (RoR). It is calculated by multiplying potential outcomes by the chances of them occurring and then totaling these... Portfolio
A portfolio is a grouping of financial assets such as stocks, bonds, commodities, currencies and cash equivalents, as well as their fund counterparts, including mutual, exchange-traded and closed funds. A portfolio can also consist of non-publicly...