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Expert-verified Found in: Page 145 ### Essentials Of Investments

Book edition 9th
Author(s) Zvi Bodie, Alex Kane, Alan Marcus, Alan J. Marcus
Pages 748 pages
ISBN 9780078034695

# Use the following scenario analysis for stocks X and Y to answer CFA QuestionsQuestion: What are the expected returns for stocks X and Y? The correct answer is:

E(rX ) = 20%

E(rY ) = 10%

See the step by step solution

## Given information

Probability (scenario- Bear Market) = 0.2

Probability (scenario-Normal Market) = 0.5 and

Probability (scenario- Bull Market) = 0.3

Return for Stock X (all 3 scenarios) = --20%, 18% and 50%

Return for Stock Y (all 3 scenarios) = --15%, 20% and 10%

## Calculation of expected return for stocks X and Y

Expected return = [Probability (Scenario) x Return in Scenario]

Hence,

E(rX) = [0.2 x (–20%)] + [0.5 x 18%] + [0.3 x 50%)] = 20%

E(rY) = [0.2 x (–15%)] + [0.5 x 20%] + [0.3 x 10%)] = 10% ### Want to see more solutions like these? 