3. The stock of Digimon is expected to produce the following returns given the v
ID: 2776427 • Letter: 3
Question
3.
The stock of Digimon is expected to produce the following returns given the various states of the economy.
Probability
State of of State of Rate of
Economy Economy Return
Recession 0.20 -0.18
Normal 0.70 0.09
Boom 0.10 0.14
Explanation / Answer
Rp=Pa×Ra+Pb×Rb+Pc×Rc
Rp is return on portfolio
P is probability of respective portfolios
R is return on respective portfolios
= 0.20×-0.18+0.70×0.09+0.10×0.14
Expected return = 4.1%