So since Toyota and Pfizer is equally weighted in this example,

we can just take the average of these two possible returns in each state.

In an expansion, the portfolio return in this case would be 4.25%.

In normal times it would be 3.5%.

In a recession it would be 1.5% and

in depression it would be 5%.

And now, we can find the expected return, again, just we did before,

as the probability weighted average of these possible outcomes.

So the portfolio return will be 0.1 x

4.25% + 0.4 x 3.5%,

1.5%, 0.2 x 5%,

which would give you 3.275%,

which is the expected return to this portfolio.

Now, alternatively, notice that we could've also find

the expected return, by Using the,

taking the average of these, the expected returns of the individual assets.

We could've found the expected term on this portfolio,

as the weighted average of the expected return on each assets.

In other words, we could have written the weight in Toyota,

times its expected return plus the weight

in Pfizer, times its expected return.

And again, it would have

given us 3.275%.

In general, the expected return of a portfolio is simply equal to the weighted

average of the expected returns in each asset.

So if you have two assets, asset 1,

with weight W1, and asset 2, with weight W2.

What is the portfolio return?

The expected expenditure on the portfolio?

Well, it will be that the weight of the first one times the expected return on

the first one plus the weight of the second one times the expected return

on the second one.

Now, if you have N asset, if you have more

than two assets, if you had N assets,

each with weight WI in expected return, RI,

what is the portfolio expected return on that portfolio,

it would be the weighted average of the expected

returns on the individual assets.

So we already looked at two asset portfolios.

What if we make an equally weighted portfolio of all three assets?

Well, it's simply going to be that one third times,

they expect a return on Toyota one third times the expected the return on Walmart,

one-third times the expected return on Pfizer

which will give you the expected return on a portfolio

that is equally weighted of the all three assets.

So in this lecture,

we talked about the fact that investors rarely hold only a single asset.

Instead, they typically hold a collection of assets, or a portfolio of assets.

So you learn how to compute the portfolio expected return.