Question

Attempts: 0 Average: 12 5. The probabilistic approach to calculate expected returns Investors are willing to make investments because they expect a return from doing so. As the name suggests, expected returns are not assured. Because they occur in the future, expected returns cannot be observed either, so stock analysts substitute historical realized returns in their mathematical analyses. Realized return is the name for returns that have actually been earned. Many analysts use past realized returns to both predict future performance and to estimate the riskiness of the asset Realized returns on Blue Moose Producers are given in the following table: 2013 14.74% 2014 8.80% 2015 13.31% 2016 27.50% 2017 7.15% Stock Return The average realized return on Blue Moose Producers's stock from 2013 to 2017 was 14.30% from Blue Moose Producers's stock and the Based on economic conditions, you compiled the following information with estimates imates 14.30% probabilities associated with the economic condition for the next year: 44.33% 28.60% Market Condition Probability (p) Market rate of Return (1) 35.75%

Answer 1

Answer a.

Average Return = [0.1474 + 0.0880 + 0.1331 + 0.2750 + 0.0715] / 5
Average Return = 0.7150 / 5
Average Return = 0.1430 or 14.30%

The average realized return on Blue Moose Producer’s stock from 2013 to 2017 was 14.30%

Answer b.

Expected Return = 0.20 * 0.15 + 0.35 * 0.09 + 0.45 * (-0.12)
Expected Return = 0.0075

Variance = 0.20 * (0.15 - 0.0075)^2 + 0.35 * (0.09 - 0.0075)^2 + 0.45 * (-0.12 - 0.0075)^2
Variance = 0.01375875

Standard Deviation = (0.01375875)^(1/2)
Standard Deviation = 0.1173 or 11.73%