Question

9.) There are three assets to be considered: stocks, bonds, and commodities. The current prices of these assets are listed below:

Asset	Current Price
Stocks	$500
Bonds	$1000
Commodities	$200

The following table lists the possible prices of these assets a year from today, with the corresponding probabilities.

Stocks		Bonds		Commodities
Probability	Price	Probability	Price	Probability	Price
0.25	$700	0.4	$1100	0.2	$250
0.25	$650	0.6	$1050	0.25	$240
0.25	$600			0.25	$230
0.25	$550			0.3	$220

What is the expected return (in %) of bonds? Round your answer to at least 2 decimal places.

Answer 1

Current Price of the Bond = $ 1000

Expected Value = Value1 * Prob1 + Value2 * Prob2

Value1 is 1st value expected  

Value2 is 2nd value expected

Prob1 is probablility for Value 1

Prob2 is probablility for Value 2

Expected Value = 1100 * 0.4 + 1050 * 0.6

= 1070

Expected Return = (Expected Value - Current Value)/ Current Value

  = (1070-1000)/ 1000

= 0.07 Or 7%

Expected Return on Bond is 7%

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