Question

Hull Consultants, a famous think tank in the Midwest, has provided probability estimates for the four potential economic states for the coming year. The probability of a boom economy is 13%, the probability of a stable growth economy is 18%, the probability of a stagnant economy is 47%, and the probability of a recession is 22%. Estimate the expected returns on the following individual investments for the coming year.

Investment	Boom	Stable Growth	Stagnant	Recession
Stock	24%	10%	2%	-12%
Corporate bond	9%	8%	6%	3%
Government bond	8%	7%	5%	2%

​Hint: Make sure to round all intermediate calculations to at least seven​ (7) decimal places. The input​ instructions, phrases in parenthesis after each answer​ box, only apply for the answers you will type.

a) What is the expected return of the stock​ investment?

B)What is the expected return of the corporate bond​ investment?  

c)What is the expected return of the government bond​ investment?

Answer 1

a

Stock
Scenario	Probability	Return%	=rate of return% * probability
Boom	0.13	24	3.12
Growth	0.18	1	0.18
Stagnant	0.47	2	0.94
Recession	0.22	-12	-2.64
	Expected return %=	sum of weighted return =	1.6

b

Corp bond
Scenario	Probability	Return%	=rate of return% * probability
Boom	0.13	9	1.17
Growth	0.18	8	1.44
Stagnant	0.47	6	2.82
Recession	0.22	3	0.66
	Expected return %=	sum of weighted return =	6.09

c

Govt bond
Scenario	Probability	Return%	=rate of return% * probability
Boom	0.13	8	1.04
Growth	0.18	7	1.26
Stagnant	0.47	5	2.35
Recession	0.22	2	0.44
	Expected return %=	sum of weighted return =	5.09