Question

Consider the following information: State of Economy Probability of State of Economy Portfolio Return If State Occurs Recession .22 − .16 Normal .47 .12 Boom .31 .38 Calculate the expected return.

Answer 1

20.94% is the expected rate of return

Explanation:

The following formula is to be used for the expected rate of return

Expected rate of return = Sum of probability multiply with rate of return

$=(0.22 * .16)+(.47 * .12)+(.31 * .38)$  

= 0.2094

= 20.94%

The expected rate of return means such return which an investor expects from the amount that has been invested by him into the business organization. It is significant to calculate the rate of return in order to find out the viability of a company.