Question

Compute the expected return given these three economic states, their likelihoods, and the potential returns: (Round your answer to 2 decimal places.)

Economic State Probability Return
Fast growth 0.19 37%
Slow growth 0.42 20
Recession 0.39 -13
Expected return __%

Answer 1

The expected return is calculated using the sum product of the probabilities and returns of each economic state. In this case, it is 10.33% after rounding to two decimal places.

Step-by-step explanation:

To compute the expected return of an investment given different economic states, their likelihoods (probabilities), and their corresponding returns, we use the formula for the expected value:

Expected Return = (Σ Probability of each state × Return in that state)

In this case, the formula would be applied as follows:

• Expected Return = (0.19 × 37%) + (0.42 × 20%) + (0.39 × -13%)
• Expected Return = (0.07) + (0.084) + (-0.0507)
• Expected Return = 0.1033 or 10.33%

Therefore, the expected return is 10.33%, rounded to two decimal places.