Ch 08. Assignment - Risk and Rates of Return Search this course 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 for 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 Happy Dog Soap Company (HDS) and Black Sheep Broadcasting (858). Three-quarters of Aaron's portfolio value consists of HDS's shares, and the balance consists of BSP'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 Happy Dog Soap 209 Probability of Occurrence 0.20 0.35 Black Sheep Broadcasting 299 Strong Normal 16% 1296 Weak -206 0.45 -16% 0 X Calculate expected returns for the individual stocks in Aaron's portfolio as well as the expected rate of return of the entire port over the three possible market conditions next year. The expected rate of return on Happy Dog Soaps stock over the next year is The expected rate of return on Black Sheep Broadcanting's stock over the next year to The expected rate of return on Aaron's portfolio over the next year is The expected returns for Aaron's portfolio were calculated based on thre1.56% conditions in the market, such condition will vary from time to time, and for each condition there will be a specific outcome. These prod 1.762 nd outcomes can be represented in the form of continuous probability distribution graph, 1.115 For example, the continuous probability distributions of rates of roturno pr two different companies are shown on the following graph 1.30% PROBABILITY DENSITY Company PROHABILITY DENSITY Campanya Company -40 -20 0 20 60 RATE OF RETURN (Percent) Based on the graph's information, which of the following statements is true? O Company A has lower risk. Company B has lower risk