Question

Consider the following information: State of Economy Probability of State of Economy Rate of Return if State Occurs Recession 0.21 -0.08 Normal 0.55 0.16 Boom 0.24 0.25 Required: Calculate the expected return.

Answer 1

Answer:

13.12%

Explanation:

The computation of the expected return is shown below:

= (Expected return of the recession × weightage of recession) + (expected return of the normal economy × weightage of normal economy) + (expected return of the boom × weightage of boom)

= (-0.08 × 0.21) + (0.16 × 0.55) + (0.25 × 0.24)  

= - 0.0168 + 0.088 + 0.06

= 13.12%