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	28%	15%	3%	-10%
Corporate bond	9%	7%	6%	3%
Government bond	8%	6%	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	28	3.64
Stable	0.18	15	2.7
Stagnant	0.47	3	1.41
Recession	0.22	-10	-2.2
	Expected return %=	sum of weighted return =	5.55

b

Corp. bond
Scenario	Probability	Return%	=rate of return% * probability
Boom	0.13	9	1.17
Stable	0.18	7	1.26
Stagnant	0.47	6	2.82
Recession	0.22	3	0.66
	Expected return %=	sum of weighted return =	5.91

c

Govt. bond
Scenario	Probability	Return%	=rate of return% * probability
Boom	0.13	8	1.04
Stable	0.18	6	1.08
Stagnant	0.47	5	2.35
Recession	0.22	2	0.44
	Expected return %=	sum of weighted return =	4.91