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 $($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:

Juan owns a two$-$stock portfolio that invests in Celestial Crane Cosmetics Company $($CCC$)$ and Lumbering Ox Truckmakers $($LOT$).$ Three$-$

quarters of Juan's portfolio value consists of CCC$\text{'}$s 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:

Calculate expected returns for the individual stocks in Juan'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 Celestial Crane Cosmetics's stock over the next year is

The expected rate of return on Lumbering Ox Truckmakers's stock over the next year is

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

The expected returns for Juan'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.