Question

On pages 350-351, the text discusses the expected measures of return and risk. The expected return can be based on the weighted average of the probabilities of a state of nature, such as boom economy, normal economy, and recession (see table on page 351).

Here is a table of probabilities:

Nature                         Probability         Expected Return under that scenario

Boom Economy              .25                          16%

Normal Economy              .60                                    10%

Recession .15 8%

Calculate the expected rate of return based on the above table. HINT: See the equation used on page 351 where they show an 8.5 percent return.

Answer 1

prbability	return	Expected return
			0.25	16.00	4.00
0.6	10.00	6.00
0.15	8.00	1.20
Expected return		11.20