Question

There is a probability of 0.7 that there will be extremely cold weather this coming Winter. If it does, we expect investors of Star \& Bucks to achieve a return of 0.16. Else, investors may expect a lower return of 0.09 . Can you estimate the expected return for investors of Star \& Bucks? Type your answer as decimal (i.e. 0.052 and not 5.2\%). Round your answer to the nearest four decimals if needed.

Answer 1

To estimate the expected return for investors of Star & Bucks, we can use the weighted average formula and calculate the expected return as 0.139.

Step-by-step explanation:

To estimate the expected return for investors of Star & Bucks, we can use the weighted average formula. We multiply the probability of each outcome by its corresponding return and sum them up.

Given that there is a probability of 0.7 for extremely cold weather and a return of 0.16, and a probability of 0.3 for no extremely cold weather and a return of 0.09, the expected return can be calculated as:

1. Expected return = (0.7 * 0.16) + (0.3 * 0.09)
2. Expected return = 0.112 + 0.027
3. Expected return = 0.139

Therefore, the expected return for investors of Star & Bucks is approximately 0.139.