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Consider the following information: State of Economy Probability of State of Economy Portfolio...

Question:

Consider the following information:

State of Economy Probability of State of Economy Portfolio Return if State Occurs Recession
Normal 0.55 0.16
Normal 0.55 0.16
Boom 0.26 0.24

Calculate the expected return.

Expected return on a Stock:

Expected return of a stock is given as the sum of the individual returns under different states of economy multiplied by the individual probabilities of the different states of economy.

Answer and Explanation:

Expected return

= Sum of (Individual return x Individual probabilities)

= (0.55 x 0.16 + 0.26 x 0.24 - 0.81 x 0.10)

= 6.94%

(Total probabilities...

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Expected & Unexpected Returns on Assets: Definition & Examples

from Finance 101: Principles of Finance

Chapter 12 / Lesson 2
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