12.38% | 10.52% | 16.71% | 14.86%

22.16% | 20.19% | 11.62% | 17.87%

11.69% | 18.56% | 16.50% | 13.75%

Remember, the expected value of a probability distribution is a statistical measure of the average (mean) value expected to occur during all possible circumstances. To compute an assets expected retum under a range of possible crcumstances (or states of nature), multiply the anticipated return expected to result during each state of nature by its probability of occurrence. Consider the following case: James owns a two-stock portfolio that invests in Celestial Crane Cosmetology Company (CCC) and Lumbering Ox Lumber Mill (LOT). Three-quarters or James's portfolio value consists of coc's shares, and the balance consists of LOTS shares. Each stock's expected retum for the next year will depend on forecasted market conditions. The expected returns from the stodes in different market conditions are detailed in the following table: Celestial Crane Cosmetology 27.5% Market Condition Probability of Occurrence Strong 50% Normal 25% Weak 25% Lumbering Ox Lumber MIII 38.5% 22% 16.5% -22% -27.5% Calculate expected returns for the individual stocks in James's portfolio as well as the expected rate or return of the entire portfolio over the three possible market conditions next year. The expected rate of return on Celestial Crane Cosmetology stock over the next year is The expected rate of return on Lumbering ox Lumber Mul's stock over the next year is The expected rate or return on James's portfolio over the next year is The expected returns for James portfolio were calculated based on three possible conditions in the market. Such conditions will vary from time to time, and for each condition there will be a specific outcome. These probabilities and outcomes can be represented in the form of a continuous probability distribution graph For example, the continuous probability distributions of rates of return on stocks for two diferent companies are shown on the following graph: The expected retums for James's portfolio were calculated based on three possible conditions in the market. Such conditions will vary from time to time, and for each condition there will be a specific outcome. These probabilities and outcomes can be represented in the form of a continuous probability distribution graph, For example, the continuous probability distributions of rates of return on stocks for two different companies are shown on the following graph: PROBABUITVOERSITY Company Company -30 20 RUTE OF REVEN Based on the graphs information, which company's returns exhibit the greater risk Company H O company