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Homework answers / question archive / Calculating Expected Return Based on the following information, calculate the expected return
Calculating Expected Return Based on the following information, calculate the expected return. State of Economy Probability of State of Economy Rate of Return if State Occurs Recession Normal Boom .15 .60 .25 - 12 .10 .27
The expected return is computed as follows:
= Prob. of recession x Return in recession + Prob. of Normal x Return in Normal + Prob. of Boom x Return in Boom
= 0.15 x - 0.12 + 0.60 x 0.10 + 0.25 x 0.27
= - 0.018 + 0.06 + 0.0675
= 10.95%
