Question

A fruit company has 20% returns in periods of normal rainfall and –3% returns in droughts. The probability of normal rainfall is 60% and droughts 40%. What would the fruit company’s expected returns be?

Answer 1

10.8%

Step-by-step explanation:

The computation of the expected returns is shown below:

= Return in periods of normal rainfall × probability of normal rainfall + return in droughts × probability of droughts

= 20% × 60% + -3% × 40%

= 12% - 1.2%

= 10.8%

Basically we multiplied the returns with its probabilities so that the approximate expected rate of return could come.