Question

compute the expected return given these three economic states, their likelihoods, and the potential returns: fast growth state has a probability of 0.3 and 40% return. slow growth state has a probability of 0.4 and 15% return. recession state has a probability of 0.3 and -15% return. group of answer choices

Answer 1

The expected return given these three economic states is 11.73%

What is the expected return based on the probabilities?

The expected return  based on the potential return and probabilities is the sum of the returns in different states multiplied by their probabilities as indicated below:

expected return=(return of fast growth rate*its prob)+(retrurn of slow growth rate*its prob)+(recession state rate*its prob)

expected return=(40%*0.3)+(15%*0.4)(-15%*0.3)

expected return=11.73%

In other words, the expected return is weighted average of possible returns alongside their probabilities

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