Question

Given the following probability distributions of the economics states(i), what are the expected returns for the Market (m) and for Security (0)? State(i) PRO) K(m) K() 0.3 -10% 40% 0.4 -20 N 0.3 w 30

please show work in written form (not excel) thank you.

Answer 1

	Market (m)	Security J (j)
Expected returns	10%	13%

• The expected return is calculated by multiplying forecasted returns by the probabilities of those returns.
  • Expected return = Sum (Probability × Return)
    • Probability = estimated probability of occurrence of each scenario
    • Return = forecasted return in each scenario

    • State(i)	PR(i)	K(m) %	PR(i) × K(m) (%)	K(j) %	PR(i) × K(j) (%)
      1	0.3	-10	-3.00	40.00	12.00
      2	0.4	10	4.00	-20.00	-8.00
      3	0.3	30	9.00	30.00	9.00
      EXPECTED RETURN			10.00	50.00	13.00