Question

Laura is considering investing in a company's stock and is aware that the return on that investment is particularly sensitive to how the economy is performing. Her analysis suggests that four states of the economy can affect the return on the investment.
Probability Return
Boom 0.3 25.00%
Good 0.1 15.00%
Level 0.3 10.00%
Slump 0.3 -5.00%




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Use the table of returns and probabilities above to determine the expected return on Laura’s investment? (Round answer to 3 decimal places, e.g. 0.076.)

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Use the table of returns and probabilities above to determine the standard deviation of the return on Laura's investment? (Round answer to 5 decimal places, e.g. 0.07680.)

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Answer 1

Answer:

The expected return on this investment is 10.500%

Explanation:

The expected return is the return anticipated by the investors based on the different circumstances and how the return can change under these circumstances. The expected return can be calculated by multiplying the probability of each circumstance by the return under that circumstance.

Expected return = pA * rA  +  pB * rB + ... + pN * rN

Where,

• p represents probability of each event
• r represents return under each event

Expected return = 0.3 * 0.25  +  0.1 * 0.15  +  0.3 * 0.1  +  0.3 * -0.05

Expected return = 0.105 or 10.500%