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.

State 1 2 Security A 0.02 0.14 Security B 0.00 0.18 If the probability of state 1 is 0.2 and the probability of state 2 is 0.8, calculate: (LG 21-6)

a. The expected return of each security.

b. The expected return on the portfolio in each state.

c. The expected return on the portfolio.

AppendixLO1