Response to the following problem:
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 .02 .14
Security B .00 .18
If the probability of state 1 is .2 and the probability of state 2 is .8, calculate:
a. The expected return of each security.
b. The expected return on the portfolio in each state.
c. The expected return on the portfolio.