Question

The following data represent the probability distribution of the holding period returns for an investment in Lazy Rapids Kayaks (LARK) stock. State of the Economy Scenario #(s) Probability, p(s) HPR Boom 1 0.336 28.40% Normal growth 2 0.414 7.90% Recession 3 0.25 -18.90% a. What is the expected return on LARK? (Round your answer to 2 decimal places.) Expected return

Answer 1

Answer:

• 17.5%

Explanation:

The expected return is the weighted average of the expected returns in each scenario by its respective probability.

The distribution of the holding period returns (HPR) under three different scenarios is:

State of the economy    Scenario #(s)     Probability, p(s)    HPR

HPR Boom                         1                            0.336              28.40%

Normal growth                  2                           0.414                7.90%

Recession                          3                           0.25                18.90%

The calculations are:

        $E(HPR) = 0.336\times 28.40\%+0.414\times 7.90\%+0.25\times 18.90\%$

        $E(HPR)=17.5\%$