Suppose you have predicted the following returns for Apple Inc. stock in three possible states of...
- Suppose you have predicted the following returns for Apple Inc. stock in three possible states of nature. What is the expected return to Apple Inc.?
State Probability of State Apple Inc. Returns
Boom 0.4 - 0.12
Normal 0.3 0.06
Bust 0.27
Homework Answers
Expected Return is weighted average return of the stock
Expected Return E(R) = P1 * R1 + P2 * R2 + P3 * R3
P3 = 1 - P1 - P2 = 1 - 0.4 - 0.3 = 0.3
Expected return E (R) = 0.4 * -12% + 0.3 * 6% + 0.3 * 27% = 5.1%
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