Question

Compute the expected return given these three economic states, their likelihoods, and the potential returns: (Round your answer to 1 decimal place.) Economic State Probability Return Fast Growth 0.3 40% Slow Growth 0.4 10 Recession 0.3 -25

Answer 1

Information provided:

Probability of fast growth economy= 0.3

Probability of slow economy= 0.40

Probability of recession= 0.30

Rate of return of boom economy= 40%

Rate of return of normal economy= 10%

Rate of return of recession= -25%

Expected return= 0.3*40% + 0.4*10% + 0.3*-25%

  = 12 + 4 – 7.50

                          = 8.50%.

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