Question

Lofty Inc. is considering investing in a game which can provide the corporation with the following returns as the outcomes: Probability of Investment States Occurrence Returns State 1: Economic boom 18% 20% State 2: Economic growth 42% 16% State 3: Economic decline 30% 3% State 4: Depression 10% -25% Calculate the expected rate of return for this investment.

Answer 1

Answer: 16.82%

Step-by-step explanation:

The expected return of an investment is a weighted average of the different returns given the probabilities that certain states occur in the economy.

=( 18% * 20%) + (42% * 16%) + (30% * 3%) + (10% * -25%)

= 0.036 + 0.0672 + 0.009 - 0.025

= 0.1682

= 16.82%