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 two$-$stock portfolio that invests in Falcon Freight Company $($FF$)$ and Pheasant Pharmaceuticals $($PP$).$ Three$-$quarters of

David's portfolio value consists of FF$\text{'}$s shares, and the balance consists of PP$\text{'}$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:

Calculate expected returns for the individual stocks in David'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 Falcon Freight's stock over the next year is

The expected rate of return on Pheasant Pharmaceuticals's stock over the next year is

The expected rate of return on David's portfolio over the next year is

The expected returns for David'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:

Based on the graph's information, which of the following statements is true?

Company A has lower risk.

Company B has lower risk.