Question

Calculate expected return based on the following information 1. Prob.Of State State of Economy Return if State Occurs 10% Recession 20 Normal 50 8% 17% Boom 30

Answer 1

The expected return is the sum of probabilities of each state occuring times the return if the state occurs.

So, Expected Return in this case =

P(State of Economy) * E(R) if the state occurs

So, Expected Return = 0.20* 10% + .50* 8% + 0.30 * 17% = 2% + 4% + 5.1% = 11.1%

The expected return is 11.1%