00:01
For this problem, we are told that we recently purchased a stock that is expected to earn 22 % in a booming economy, 9 % in a normal economy, and to lose 10 % in a recessionary economy.
00:12
We're told that there is a 5 % probability of a boom and a 65 % chance of a normal economy.
00:17
We're asked, what is our expected rate of return on this stock? so, the expected value of a random variable like this is going to be equal to the sum over the different possibility, of the value of that possibility times the probability of that possibility.
00:35
So this is going to be equal to 0 .22, so this is for the booming economy, 0 .22 times, now for the chance of a boom, that's 0 .05.
00:48
Then we have plus 0 .09 times 0 .65, then we'd have to have minus 0 .1 times the remaining probability.
01:00
0 .05 plus 0 .65 is 0 .7.
01:04
So the remaining probability is going to be 0 .3...