The probability that the economy will contract is 0.2. The probability of moderate growth is 0.6, and the probability of a rapid expansion is 0.2. If the economy contracts, you can expect a return on your portfolio of 5 percent. With moderate growth, your return will be 8 percent. If there is a rapid expansion, your portfolio will return 15 percent.
1. What is your expected return?
2. What is the standard deviation of the return?
Expected return = Sum of (Probability of event i * return when ...
The solution calculates the expected return and standard error of the stock portfolio