Question

An analyst believes that economic conditions during the next year will either be strong, normal, or weak, and she thinks that the Corrigan Company's returns will have the following probability distribution.

Conditions Probability (%) Return (%)

Strong 30 30

Normal 40 15

Weak 30 -10

What is Corrigan’s expected return?

Answer 1

$Expected return (Rp) = \Sigma (Wi * Ri)$

$Corrigan's expected return = (0.3 *30) + (0.4*15) +(0.3*10)$

$Expected return = 9+6+3$

Expected return = 18%