Answer:
Expected Value of the return = 12.6%
Explanation:
<em>The expected rate of return is the weighted average of all the possible returns associated with an investment decision. The returns are weighted using the probability associated with their outcomes.
</em>
Expected return = WaRa + Wb+Rb + Wn+Rn
W- weight of the outcome, R - return of the outcome
W- Probability of the expected outcome, R- expected return under a circumstance
<em>The probability of having a normal economy</em>
Note that the sum of the probability of different outcomes should equal to one. Hence, the probability of economy being normal is
= 100% -(15%+30%)= 55%.
<em>Expected Value of the return </em>
(0.3× 30%) + (0.55× 12%) + (0.15 × -20%)
=0.126
=0.126
× 100
= 12.6
%
Expected Value of the return = 12.6%