Question

Remember, the expected value of a probabulity distribution is a statistical measure of the averoge (mean) value expected to occur during all possible curcumstances. To compute an asset's expected retuin under a range of possible circumstances (or states of nature), multiply the anticipated return expected to result duning each state of nature by its probability of occurrence. Consider the following case: Lan owns a two-stock portfolio that invests in Blue Lama Mining Compony (BLM) and Hungry Whale Electronics (HWE). Three-quarters of lan's portfolio value consists of BLM's shares, and the balance consists of HWE's shares. Each stock's expected return for the next year wall depend on forecasted market conditions. The expected returns from the stocks in different market conditions are detailed in the following table: Calculate expected returns for the individual stocks in lan's portfolio as well as the expected rate of return of the entire portfolio over the three passible market conditions next year. - The expected rate of return on Blue Liama Mining's stock over the next year is - The expected rate of return on Hungry Whale Blectronics's stock over the next year is - The expected rate of return on lan's portfolio over the next year is For example, the continuous probability distributions of rates of return on stocks for two different companies are shown on the following graph: Based on the graph's information, which statement is false? Company H has lower risk. Company G has lower risk.

Answer 1

The expected rate of return, risk, and actual rate of return are crucial in evaluating an investment's potential profitability and safety, with risk demanding a higher expected return and influencing the variability of actual returns.

Step-by-step explanation:

The expected rate of return is a key concept in finance and investment, representing the probable return on an investment based on its potential outcomes and the likelihood of each outcome. To evaluate the safety and profitability of different investments, one must consider the expected rate of return, associated risk, and the actual rate of return which may differ due to market volatility and other factors.

Risk is an essential consideration in investment decisions, involving uncertainties such as default risk and interest rate risk. Higher risk investments typically demand higher expected returns to compensate for the greater uncertainty in outcomes. Conversely, low-risk investments usually offer more stable actual returns, closer to the expected rate of return year after year.

For any investment, analyzing these aspects helps investors align their choices with their financial goals and risk tolerance, whether they're considering stocks, bonds, bank accounts, or other financial instruments.