The probabilitythe 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, the expected retun on the portfolio is 5%. Moderate growth will have an 8% return, and rapid expansion will return 15%.
What is the expected return? What is the standard deviationof the return?
The expected return is calculated as Sum(Probability X associated return)
Expected return = 0.2X5% …
The solution explains how to calculate the expected return and standard deviation given the probability distribution.