E8-2 Four analysts cover the stock of Fluorine Chemical. One forecasts a 5% retu

Question

E8-2 Four analysts cover the stock of Fluorine Chemical. One forecasts a 5% return for the coming year. A second expects the return to be negative 5%. A third predicts a 10% return. A fourth expects a 3% 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%, 5%, 20%, and 40%, respectively, to the analysts' forecasts. Given these probabilities, what is Fluorine Chemical's expected return for the coming year?

Explanation / Answer

expected return for the coming year =(.35x5)-(.05x5)+(.2x10)+(.4x3)= 4.7%

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