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Economic Scenarios

Financial analysts believe that there are four equally likely states of the economy: depression, recession, normal, and boom times. The returns on the Supertech Company are expected to follow the economy closely, while the returns on the Slowpoke Company are not. The return predictions are as follows:

Supertech Returns Slowpoke Returns
Depression -20% 5%
Recession 10% 15%
Normal 25% 13%
Boom 45% 9%

Calculate the expected return for each company
Based on the data above, calculate the variance

Solution Preview

Since each state is equally likely the weight for each state is 1/4 = 0.25.

Expected return for Supertech: 0.25 * -20% + 0.25 * 10% + 0.25 * 25% + 0.25 * 45% = -5% + 2.5% + 6.25% + ...

Solution Summary

This solution calculates the expected returns and variances for two companies based on four economic scenarios.

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