The return for two companies, Alpha and Beta, depends on the strength of the economy.

Economy Probability Alpha Return Beta Return

strong 0.3 12% 5%

normal 0.4 6% 8%

weak 0.2 2% 10%

What is the expected return for Alpha and Beta?

Use your answers for question 3 and 4 to determine the expected return of a portfolio that invests75%in Alpha and 25% in Beta. The expected return is?

Now consider a portfolio that invests 75% in Alpha and 25% in Beta. What are the expected returns if the economy is strong, normal, and weak?