Three assets, F, G, and H, are currently being considered. The probability distr

Question

Three assets, F, G, and H, are currently being considered. The probability distribution of expected returns for these three assets is shown in the table below:

              Asset F                            Asset G                   Asset H

     Probability / Return        Probability / Return         Probability / Return

       .10     /   40%                   .40     /    35%                  .10        /    40%

        .20    /    10%                   .30     /    10%                  .20       /   20%

        .40    /    0%                      .30     /    -20%                 .40      /    10%

       .20     / -5%                                                                 .20     /     0%

       .10   /    -10%                                                               .10     /    -20%

                               Calculate the expected value of return for each of the three assets.                                                                                                                      

Explanation / Answer

The expected value of return shall be the weighted average return based on probable returns. The expected returns of each of the following are given as follows:

Asset F Scenario Return
(A) Probability
(B) Probable Return
{C=A *B} I 40% 0.1 4% II 10% 0.2 2% III 0% 0.4 0% IV -5% 0.2 -1% V -10% 0.1 -1% Expected Return 4% Asset G Scenario Return
(A) Probability
(B) Probable Return
{C=A *B} I 35% 0.4 14% II 10% 0.3 3% III -20% 0.3 -6% Expected Return 11% Asset H Scenario Return
(A) Probability
(B) Probable Return
{C=A *B} I 40% 0.1 4% II 20% 0.2 4% III 10% 0.4 4% IV 0% 0.2 0% V -20% 0.1 -2% Expected Return 10%

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