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Ksju [112]
3 years ago
11

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
Business
1 answer:
Brut [27]3 years ago
6 0

Answer:

<u></u>

  • <u>17.5%</u>

Explanation:

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

The <em>distribution of the holding period returns </em>(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\%

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