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You implement a moderate aggressive strategy: investing 60% in stocks and 40% in bonds. The possible annual returns of stocks and bonds are dependent on

You implement a moderate aggressive strategy: investing 60% in stocks and 40% in bonds.

The possible annual returns of stocks and bonds are dependent on the market situations:

Probability Stock returns Bond returns
Market is Up 0.65 20% 3%
Market is Down (Recessions) 0.35 -30% 5%

The column "probability" shows the "chance" that the market is up or down. For example, 65% indicates that there is 65% chance that the market is up.

Answer the following questions:

1. What is the expected return of the stock ? What is the expected return of the bond?

2. Based on your answers in Q1, what is the weighted average return of your portfolio? (hint: you invest 60% in stocks and 40% in bonds)?

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