Question

Consider the following information:

  

State of Economy	Probability of State of Economy	Rate of Return if State Occurs
Recession	0.21	-0.06
Normal	0.45	0.13
Boom	0.34	0.22

  

Required:

Calculate the expected return.

Answer 1

The expected return of an asset is the sum of the probability of each state occurring times the rate of return if that state occurs. So, the expected return of each stock is:

E(R) = .21(-.06) + .45(.13) + .34(.22)

E(R) = .1207 or 12.07%