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 orcumstances (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: Alyssa owns a two-stock portfolio that invests in Falcon Freight Company (FF) and Pheasant Pharmaceuticals (PP). Three-quarters of Alyssa's portfolio value consists of Falcon Freight's shares, and the balance consists of Pheasant Pharmaceuticals'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: Probability of Occurrence Market Condition FF PP Strong 30% 4296 Normal Weak 50% 25% 25% 18% 24% 24% -30% Calculate expected returns for the individual wachsin Alyssa's portfolio as well as the expected rate of return of meantwo possible market condan next year. r th three The expected rate of return on Falcon Freight's stock over the next year is . The expected rate of return on Pheasant Pharmaceuticals stock over the next year is . The expected rate of return on Alyssa's portfolio over the next year is The expected returns for Alyssa'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. The probabilities and outcomes can be represented in the form of continuous probability distribution graph. For example, the continuous probably stributions of rates of retum on stocks for two different companies are shown on the flowing graph Company A PROBABILITY DENSITY Company B 40 -30 -20 40 50 60 -10 0 10 20 30 RATE OF RETURN (Percent) Based on the graph's information, which of the following statements is true? O Company A has a smaller standard deviation. O Company B has a smaller standard deviation