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Remember, the expected value of a probabl ity distribution is a statistical measure of the average (mean) value expected to occur during all possible circumstances
Remember, the expected value of a probabl ity 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 arange of possible ciraumstances (or states of nature), multiply the anticpated return expected to resut during each state of nature by its probab ty of occurrence. Consider the following case Tyler owns a two-stock portfolio that invests in Blue Liama Mining Company (BLM) and Hungry Whale Electranics HWE). Three-quarters of Tyler's portfolio value consists of BLM's shares, and the balance consists of HWE's shares Each stock's expected return for the next year wll depend on forecasted market conditions. The expected returns from the stocks in different market conditions are detailled in the folowing table: Market Condition Probability of Occurrence Blue Llama Mining Hungry Whale Electronics Strang Normal Weak 25% 45% 30% 49% 28% -35% 35% 21% Calculate expected returns for the individual stocks in Tyler'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 Blue Liama Mining's stock over the next year is The expected rate of return on Hungry Whale Electronics's stock over the next year is The expected rate of return on Tyler's portfolio over the next year is The expected returns for Tyler's portfolio were calculated based on three possible conditions in the market. Such conditions w., vary from timt to time, and for each condition ther t w be a specific outcome. These Probabities and outcomes can be represented in the form of a continuous probability distribution graph. For example,the continuous probability distributions of ratrs of return on stocks for two different companies are hown on the follawing graph PROBABILITY DENSITY Company G 40-20 RATE OF RETURN Percent Based on the graph's information, which statement s false Company H has lower risk. O Company G has lower risk
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