Answer:
The annualized return of the investment is R=0.286 or 28.6%.
Explanation:
The expected value takes into account all the possible outcomes and their probabilities. In this case, there are only 2 possible outcomes:
1) Mexican government lose control of the economy. Probability: 25%.
2) The Mexican government don't lose contol of the economy. Probability: 75%
In the Case 1, the local stock market will fall by 10% and the peso will lose 20%.
The return in dollars can be calculated as:
being ΔSM the return of the stock market and ΔP the apreciation of the peso.
For the Case 2, we have that the local stock market will rise by 5% and the peso will appreciate by 5%.
The return in this case is
Then, the expected value is:
The expected dollar return in the 90 days is R=0.065.
If we annualized, the annual rate of return of this investment is: