$2.$ Statistical measures of standalone risk

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 asset$$s expected return under a range of possible circumstances $($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:

Dominic owns a two$-$stock portfolio that invests in Falcon Freight Company $($FF$)$ and Pheasant Pharmaceuticals $($PP$).$ Three$-$quarters of Dominic$$s portfolio value consists of FF$$s shares, and the balance consists of PP$$s shares.

Each stock$$s expected return for the next year will depend on forecasted market conditions. The expected returns from the stocks in different market conditions are detailed in the following table:

Market Condition

Probability of Occurrence

Falcon Freight

Pheasant Pharmaceuticals

Strong $0\mathrm{.}2037\mathrm{.}5\%52\mathrm{.}5\%$

Normal $0\mathrm{.}3522\mathrm{.}5\%30\%$

Weak $0\mathrm{.}45-30\%-37\mathrm{.}5\%$

Calculate expected returns for the individual stocks in Dominic$$s portfolio as well as the expected rate of return of the entire portfolio over the three possible market conditions next year.

$$ The expected rate of return on Falcon Freight$$s stock over the next year is $.$

$$ The expected rate of return on Pheasant Pharmaceuticals$$s stock over the next year is $.$

$$ The expected rate of return on Dominic$$s portfolio over the next year is $.$