4. Statistical measures of stand-alone risk Aa Aa Risk and the probabilities eve

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4. Statistical measures of stand-alone risk Aa Aa Risk and the probabilities event occurrence vary under different ciraumstances. To identify an average expected return under a range of different possible outcomes, calaulate the expected value of a range of possible outcomes. The expected value or return is a statistical measure of the average (mean) value of all possible outcomes. Consider this case: Aaron owns a two-stock portfolio that invests in Blue Llama Mining Company (BLM) and Hungry Whale Electronics HWE). Three-quarters of Aaron's portfolio value consists of Blue Llama Mining's shares, and the balance consists of ngry Whale Electronics's shares. Each stock's expected return for the next year will depend on forecasted market conditions. The expected returns from the stocks in different market conditions are detailed in the following table: Market Condition Probability of Occurrence Blue Llama Mining Hungry Whale Electronics Strong Normal Weak 20% 35% 45% 30% 18% -24% 42% 24% -30% Calculate expected returns for the individual stocks in Aaron's portfolio as well as the expected rate of return of the entire portfolio over the three possible market conditions next year The expected rate of return on Blue Llama Mining's stock over the next year is The expected rate of return on Hungry Whale Electronics's stock over the next year is · The expected rate of return on Aaron's portfolio over the next year is

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Market Condition Probability of occurrence Blue Liama Lining Hungry Whale electronics Exepected Retrun on Blue Liama=Return*Probability Expected return onHungry Whale electronics=Return*Probability Expected return on Portfolio =Probability*(3/4*Blue Liama Lining+1/4*Hungry whale) electronics Strong 20% 30% 42% 6.00% 8.400% 6.6% Normal 35% 18% 24% 6.30% 8.400% 6.8% Weak 45% -24% -30% -10.80% -13.500% -11.5% 1.50% 3.30% 1.95%

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