Question

Four analysts cover the stock of Fluorine Chemical. One forecasts a 6​% return for the coming year. The second expects the return to be negative 6​%. The third predicts a return of 8​%. The fourth expects a 2​% return in the coming year. You are relatively confident that the return will be positive but not​ large, so you arbitrarily assign probabilities of being correct of 35 % comma 8 %​, 17 %​, and 40​%, ​respectively, to the​ analysts' forecasts. Given these​ probabilities, what is Fluorine​ Chemicals expected return for the coming​ year

Answer 1

Answer:

Expected return = 3.78%

Explanation:

Given:

Expected returns        Probabilities of being correct

 6%                                  35%

- 6%                                    8%

 8%                                   17%  

 2%                                   40%

Now,

Expected return is calculated as:

= Summation of [ Return × Probability ]

therefore,

Expected return

= ( 0.06 × 0.35 ) + ( -0.06 × 0.08 ) + ( 0.08 × 0.17 ) + ( 0.02 × 0.40 )

= 0.021 - 0.0048 + 0.0136 + 0.008

= 0.0378

or

= 0.0378 × 100%

or

Expected return = 3.78%