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Assume you have created a 2-stock portfolio by investing $30,000 in stock X with a beta of 0.8, and $70,000 in stock Y with a

Assume you have created a 2-stock portfolio by investing $30,000 in stock X with a beta of 0.8, and $70,000 in stock Y with a beta of 1.2. Market risk premium is 8% and risk-free rate is 6%.The followings are the probability distributions of Stocks X and Ys future returns:

State of Economy Probability rx ry

Recession 0.1 -10% -35%

Below average 0.2 2% 0

Average 0.4 12% 20%

Above average 0.2 20% 25%

Boom 0.1 38% 45%

What is the return you expect to earn on your portfolio?

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