Four analysts cover the stock of Fluorine Chemical. One forecasts a 6 % return for the coming year. The second expects the return to be negative 6 %. The third predicts a return of 8 %. The fourth expects a 2 % 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 % comma 8 % , 17 % , and 40 %, respectively, to the analysts' forecasts. Given these probabilities, what is Fluorine Chemicals expected return for the coming year

Question

Karissa Bates

Business

13 March, 14:14

Four analysts cover the stock of Fluorine Chemical. One forecasts a 6 % return for the coming year. The second expects the return to be negative 6 %. The third predicts a return of 8 %. The fourth expects a 2 % 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 % comma 8 % , 17 % , and 40 %, respectively, to the analysts' forecasts. Given these probabilities, what is Fluorine Chemicals expected return for the coming year

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Answers (1)

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Addison Estes · Answer 1

Expected return = 3.78%

Explanation:

Given:

Expected returns Probabilities of being correct

6% 35%

- 6% 8%

8% 17%

2% 40%

Now,

Expected return is calculated as:

= Summation of [ Return * Probability ]

therefore,

Expected return

= (0.06 * 0.35) + (-0.06 * 0.08) + (0.08 * 0.17) + (0.02 * 0.40)

= 0.021 - 0.0048 + 0.0136 + 0.008

= 0.0378

or

= 0.0378 * 100%

or

Expected return = 3.78%