Question

Risk  ​ Swan's Sportswear is considering bringing out a line of designer jeans.​ Currently, it is negotiating with two different​well-known designers. Because of the highly competitive nature of the​ industry, the two lines of jeans have been given code names. After market​ research, the firm has established the expectations shown in the following table about the annual rates of​ return,

	Probability	Line J	Line K
Excellent	0.05	0.0075	0.01
Poor	0.15	0.0125	0.025
Average	0.6	0.085	0.08
Good	0.15	0.1475	0.135
Excellent	0.05	0.1625	0.15

. Use the table​ to:

a. Calculate the expected value of return for each line.

a. The expected return for line J is ___​%. ​(Enter as a percentage and round to two decimal​ places.)

The expected return for line K is ___​%. ​(Enter as a percentage and round to two decimal​ places.)

Answer 1

Expected return = sum of (probability of state * return of state)

for Line J

	Security if State	Returns Occurs
	Prob of State of Economy	Line J
bad	5%	0.0075
poor	15%	0.0125
average	60%	0.0850
good	15%	0.1475
Excellent	5%	0.1625
	expected return	0.0835

expected return = 8.35%

for Line K

	Security if State	Returns Occurs
	Prob of State of Economy	Line K
bad	5%	0.0100
poor	15%	0.0025
average	60%	0.0800
good	15%	0.1350
Excellent	5%	0.1500
	expected return	0.0766

expected return = 7.66%