The Table below presents returns across three states of nature for two assets: Risky and Safe.The expected return on Safe is 8.4%.Which asset has a higher expected return?

A) Risky
B) Safe
C) Both have the same expected return

Question

The Table below presents returns across three states of nature for two assets: Risky and Safe.The expected return on Safe is 8.4%.Which asset has a higher expected return?

A) Risky 
B) Safe 
C) Both have the same expected return

Quizplus · Accepted Answer

Expected return = E(k) = Pr₁k₁ + Pr₂k₂ + ... + Pr_nk_n Expected return (risky) = 0.2(-5%) + 0.6(+15%) + 0.2(+25%) = 13% The risky investment has the higher expected return.

The Table Below Presents Returns Across Three States of Nature