We calculate the expected return as follows:
|
Roten |
Bradley |
||||
|
(1) |
(2) |
(3) |
(4) |
(5) |
(6) |
|
State of |
Probability of State of |
Return if |
Product |
Return if |
Product |
|
Economy |
Economy |
State |
(2) × (3) |
State |
(2) × (5) |
|
Bust |
0.4 |
Occurs |
Occurs |
||
|
Boom |
0.6 |
10% |
0.04 |
30% |
0.12 |
|
40% |
0.24 |
10% |
0.06 |
||
|
E(R) = |
20% |
E(R) = |
18% |
||