Andrew Mahlangu is an investor and he wants to invest in one of two shares. These two shares have the following risk profiles: Economic state Probability Expected return Share AB Share GH 1 0.40 4% 14% 2 0.40 12% 20% 3 0.40 15% -6% The following information is available: - Risk-free rate is 4% - Standard deviation of expected return is 6% - Market return is 17% Required: Calculate the expected returns for shares AB and GH.
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To calculate the expected return for share AB, we multiply the probability of each economic state by its corresponding expected return and sum them up. Expected return for share AB = (0.40 * 4%) + (0.40 * 12%) + (0.40 * 15%) Expected return for share AB = 1.6% + Show more…
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