Question

Based on the scenarios below, what is thelexpected return for a portfolio with the following return profile?Market Condition Bear Normal Bull .3 10% Probability Rate of return .2 -25% 24%

Answer 1

The expected return for a portfolio is calculated by multiplying the return for each scenario by the probability of that scenario occurring, and then summing up these values.

Step-by-step explanation:

The expected return for a portfolio is calculated by multiplying the return for each scenario by the probability of that scenario occurring, and then summing up these values.

In this case, we have three scenarios: Bear, Normal, and Bull. The probability and return rates for each scenario are given.

Bear: Probability = 0.3, Return = -25%

Normal: Probability = 0.2, Return = 0%

Bull: Probability = 0.5, Return = 24%

To calculate the expected return, we multiply the probability of each scenario by its return rate and sum up these values:

• Bear: 0.3 * (-25%) = -7.5%
• Normal: 0.2 * 0% = 0%
• Bull: 0.5 * 24% = 12%

Adding up these values gives us:

Expected Return = -7.5% + 0% + 12% = 4.5%