Author Question: Given the expected returns and probabilities of various states of the world in this table, what is ... (Read 42 times)

tatyanajohnson · **on:** Jul 10, 2018

Given the expected returns and probabilities of various states of the world in this table, what is the expected return for Carbide Company?

Carbide Company
State of the Economy Probability of State Return on State
Boom .30 18
Steady .55 10
Recession .15 -5

A) 10.15
B) 5.40
C) 5.50
D) -0.75

Question 2

Andre is considering an investment in Bristol Inc. and has gathered the following information. What is the expected return for a share of the firm's stock?

State of the Economy Probability of the
State Conditional Expected Return
Bristol Inc.
Recession .20 -10
Steady .50 10
Boom .30 45

A) 45.00
B) 65.00
C) 16.50
D) 15.00

Jbrasil · **Reply #1 on:** Jul 10, 2018

Answer to Question 1

Answer: A
Explanation: A) Expected payoff = payoffi probabilityi = .30 18 + .55 10 + .15 -5 = 10.15

Answer to Question 2

Answer: C
Explanation: C) Expected payoff = payoffi probabilityi = .20 -10 + .50 10 + .30 45 = 16.50.