11) The stocks for BMT & AWM have the following probability distributions: Econo

Question

11) The stocks for BMT & AWM have the following probability distributions:

Economy                     Probability                   BMT                AWM

Recession                    50%                             8%                   14%

Average                       30%                             14%                 17%

Boom                           20%                             20%                 22%

         a) Compute the expected rate of return for BMT.

         b) Compute the expected rate of return for AWM.

Explanation / Answer

Hi,

Please find the detailed answer as follows:

Expected Return (BMT) = Probability of Recession Economy*Rate of Return Under Recession + Probability of Average Economy*Rate of Return Under Average + Probability of Boom Economy*Rate of Return Under Boom = 50%*8% + 30%*14% + 20%*20% = .1220 or 12.20%

Expected Return (AWM) = Probability of Recession Economy*Rate of Return Under Recession + Probability of Average Economy*Rate of Return Under Average + Probability of Boom Economy*Rate of Return Under Boom = 50%*14% + 30%*17% + 20%*22% = .1650 or 16.50%

Thanks.

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