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 possibie circumstances. To compute an asset's expected return under a range of possible circumstances (or states of nature), multiply the antiopated return expected to result during each state of nature by its probability of cceurrence. Consider the following case: Joshus owns a two-stock portfolio that invests in Celestial Crane Cosmetics Company (CCC) and Lumbering Ox Truckmakers (LOT). Three-quarters of Joshue's portfolio value consists of CCC's shares, and the balance consists of LOT's shares. Each stocks expected return for the next year wal depend on forecasted market conditions. The expected returns from the stocks in different market conditions are detailed in the following table: Calculate expected returns for the individual stocks in Joshua'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 retum on Celestial Crane Cosmetics's stock over the next year is - The expected rate of retum on Lumbering Ox Truckmakers's stock over the next year is - The expected rate of return on Joshua's portfolio over the next year is The expected returns for Joshua'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