Ch $02$: Assignment $-$ Risk and Return: Part I

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:

Aaron owns a two$-$stock portfolio that invests in Blue Llama Mining Company $($BLM$)$ and Hungry Whale Energy $($HWE$).$ Three$-$quarters of Aaron's portfolio value consists of BLM$\text{'}$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:

$\backslash$table$[[$Market Condition,Probability of Occurrence,Blue Llama Mining,Hungry Whale Energy$],[$Strong$,20\%,17\mathrm{.}5\%,24\mathrm{.}5\%$