Calculate the expected returns for Roll and Ross by filling in the following tab

Question

Calculate the expected returns for Roll and Ross by filling in the following table (verify your answer by expressing returns as percentages as well as decimals): (Negative values should be indicated by a minus sign. Do not round intermediate calculations. Round your E(R) answers to 2 decimal places and your Product answers to 4 decimal places. Omit the "%" sign in your response.)

Security Returns If State Occurs   State of Probability of   Economy State of Economy Roll     Ross        Bust .40 -9 % 18 %   Boom .60 28 7

Explanation / Answer

Answer:

For Roll:

Return at Bust economy = -9% with 40% probability

Return at Boom economy = 28% with 60% probability

therefore Expected return of Roll = 0.4x-9% + 0.6x28% = -3.6% + 16.8% = 13.2%

For Ross:

Return at Bust economy = 18% with 40% probability

Return at Boom economy = 7% with 60% probability

therefore Expected return of Roll = 0.4x18% + 0.6x7% = 7.2% + 4.2% = 11.4%

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