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17 July, 07:46

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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  1. 17 July, 08:01
    0
    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%
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