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: Ian owns a two-stock portfolio that invests in Blue Ulama Mining Company (BLM) and Hungry Whale Electronics (HWE). Three-quarters of Tan's portfolio value consists of BLM's shares, and the balance consists of HWE'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 Blue Llama Mining Hungry Whale Electronics 0.25 40% 56% Strong Normal 0.45 24% 32% -32% -40% Weak. 0.30 Calculate expected returns for the individual stocks in lan'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 Blue Llama Mining's stock over the next year is The expected rate of return on Hungry Whale Electronics's stock over the next y The expected rate of return on Ian's portfolio over the next year is 11.20 % 15.12% The expected returns for Ian's portfolio were calculated based on three possible co and for each condition there will be a specific outcome. These probabilities and ou distribution graph. 9.52% 13.44% For example, the continuous probability distributions of rates of return on stocks fo PROBABILITY DENSITY Company A -60 -20 0 Company B 40 20 RATE OF RETURN (Percenti the market. Such conditions will vary from time to time, be represented in the form of a continuous probability fent companies are shown on the following graph: x The expected rate of return on Blue Llama Mining's stock over the next year is The expected rate of return on Hungry Whale Electronics's stock over the next year is The expected rate of return on lan's portfolio over the next year is 10.66% 16.40% The expected returns for lan's portfolio were calculated based on three possible condition and for each condition there will be a specific outcome. These probabilities and outcomes distribution graph. ket. Such conditions will vary from time to time, esented in the form of a continuous probability 20.34% For example, the continuous probability distributions of rates of return on stocks for two 18.53% panies are shown on the following graph: PROBABILITY DENSITY Company A -60 0 Company B 40 40 RATE OF RETURN (Percent) Ch 08- Assignment - Risk and Rates of Return ine expected rate or return on Hungry wnale electronics's stock over the next year is . The expected rate of return on Ian's portfolio over the next year is The expected returns for lan's portfolio were calculated based on three 15.00% onditions in the market. Such conditions will vary from time to time, and for each condition there will be a specific outcome. These probabil tcomes can be represented in the form of a continuous probability 10.63% distribution graph. For example, the continuous probability distributions of rates of return 16.88% or two different companies are shown on the following graph: 12.50% PROBABILITY DENSITY Company A Company B & -20 0 20 40 60 RATE OF RETURN (Percent) -60 Skala korra X The expected returns for lan'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: PROBABILITY DENSITY Company A Company B FF -40 -20 0 20 40 60 RATE OF RETURN (Percent) Based on the graph's information, which of the following statements is true? K Based on the graph's information, which of the following statements is true? Company A has a tighter probability distribution. Company B has a tighter probability distribution