An investor is considering purchasing a stock. The potential return on this stock over the next year depends on the state of the economy. Analysts have estimated the following scenarios: there is a 30% probability of a strong economy, which would yield a 15% return; a 50% probability of a moderate economy, yielding an 8% return; and a 20% probability of a weak economy, resulting in a -5% return. Based on this information, what is the anticipated average return for this investment?

Investment Decision Analysis

Impact of Probability Shifts on Expected Return

Investment Recommendation Based on Expected Return

An asset has two potential outcomes for the next year: a 60% probability of a 20% gain and a 40% probability of a 10% loss. The calculated expected rate of return is 8%. This means the most probable outcome is an 8% gain on the investment.

Comparing Investment Opportunities

Match each investment scenario with its correct expected rate of return. The expected rate of return is the average return an investment is anticipated to generate, calculated by weighting all possible returns by their likelihood of occurring.

An investment has a 25% probability of yielding a 20% return, a 50% probability of a 10% return, and a 25% probability of a -8% return. The anticipated average return for this investment is ____%.

Constructing Investment Scenarios

You are tasked with determining the anticipated average return for an investment that has several possible outcomes. Arrange the following steps in the correct logical order to perform this calculation.