Problem 11-6 Calculating Expected Return [LO 1]
Calculate the expected return. (Do not round intermediate calculations. Enter your answer as a
percentage rounded to 2 decimal places (e.g., 32.16).)Consider the following information:
Solution
The above problem states :
State of
Economy
Recession
Probability of State
of Economy
.18
Rate of Return
if State Occurs
–.11
Normal
.47
.13
Boom
.35
.32
Formulae of Exp return = Prob of occurence * return on occurence
Therefore the cumulative expected return = (Prob of Recession * return on Recession) + (Prob of
Normal * return on Normal) + (Prob of Boom * return on Boom)
Exp Return = (0.18 * -0.11) + (0.47 * 0.13) + (0.35 * 0.32)
= - 0.0198 + 0.0611 + 0.112
= 0.1533 = 15.33%
State of
Economy
Recession
Probability of State
of Economy
.18
Rate of Return

if State Occurs
–.11
Normal
.47
.13
Boom
.35
.32