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Remember, the expected value of a probability distribution is a statistical measure of the average ( mean ) value expected to occur during all possible
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:
David owns a twostock portfolio that invests in Celestial Crane Cosmetics Company CCC and Lumbering Ox Truckmakers LOT
Threequarters of David's portfolio value consists of CCCs shares, and the balance consists of LOT'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:
tableMarket Condition,Probability of Occurrence,Celestial Crane Cosmetics,Lumbering Ox TruckmakersStrong
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