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Expected Return on Investment

The expected return for an investment is 30%. If we know the following information about the return distribution of the investment, what return will the investment produce if the economic climate is average?

Climate Return Probability

Poor 20% 0.30
Average 0.50
Exceptional 40% 0.20

Solution Preview

Hello Student,

Let me first start by giving you a brief synopsis on expected return and investments. At some point in your life you may have thought about making an investment or you may have the intention to do so in the near future. Whatever it may be you need to know that when individuals make an investment, it is fairly normal for him or her to want to get the highest possible return from that investment. But, achieving such a return is not without some element of risk or uncertainty. Therefore, to have an idea of the expected return from your investment you have to considered not only the possible returns that you may gain but also the ...

Solution Summary

This solution first gives a brief synopsis on how the expected return on an investment may be applied in the real world. This is followed by a detailed step-by-step explanation as to how expected return is calculated. You are then shown how to find a particular component in the formula given that you are already given the figure for expected return.

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