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P13-6 Calculating Expected Return [LO1] Consider the following information:      State of Economy Probability of State...

P13-6 Calculating Expected Return [LO1]

Consider the following information:

  

  State of Economy Probability of State of Economy Rate of Return if State Occurs
  Recession 0.11 -0.02
  Normal 0.45 0.16
  Boom 0.44 0.24

  

Required:
Calculate the expected return.
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Answer #1

expected return. = 0.18

STATE PROBABILITY MEAN Returns(X ) (PROBABILITY * X )
RECESSION 11% -0.02                              (0.00)
NORMAL 45% 0.16                               0.07
BOOM 44% 0.24                               0.11
Total TOTAL                               0.18
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