Calculating Expected Return Based on the following information, calculate the expected return

Finance Dec 02, 2020

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

Expert Solution

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%

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