Security Returns if State Occurs State of Economy State of Economy Bust Boom Pro

Question

Security Returns if State Occurs State of Economy State of Economy Bust Boom Probability of 0.20 0.80 Roll -13% 30 Ross 13% Calculate the expected returns for Roll and Ross by filling in the following table: (A negative value should be indicated by a minus sign. Do not round intermediate calculations. Calculate the product using the decimal value of the probability and the percentage value of the return. Input all your answers as a percent rounded to 2 decimal places.) Roll Ross Probability of State of Economy State of Economy Return if State Occurs Return if State Occurs Product Product (131% 30 % E(R)- 13% 6% E(R)-s Bust 0.20 Boom 0.80 21.40 7.40

Explanation / Answer

Expected return of Roll = (20% × -13%) + (80%  × 30%)

= -2.60% + 24%

= 21.40%

Expected return of roll is 21.40%.

Expected return of Ross = (20% × 13%) + (80%  × 6%)

= 2.60% + 4.80%

= 7.40%

Expected return of ross is 7.40%.

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