- Compute the expected return given these three economic states, their likelihoods, and the potential returns. Fast growth state: probability is 0.1 and return is 50%. Slow growth state: probability is 0.6 and return is 8%. Recession state: probability is 0.3 and return is -10%.
6.8% 12.8% 16.0% 22.7%
nswer = = 6.8 %
We have been provided with the information that three economic states, their likelihoods, and the potential returns.is as follow
Fast growth state: probability is 0.1 and return is 50%
. Slow growth state: probability is 0.6 and return is 8%.
Recession state: probability is 0.3 and return is -10%.
So calculation is as follow
| Economic State | Probability | Return |
| Fast Growth | 0.1 | 50% |
| Slow Growth | 0.6 | 8% |
| Recession | 0.3 | −10% |
Expected return = 0.1×50% + 0.6×8% + 0.3×-10%
= 5% + 4.8% – 3 %
= 6.8 %
