Answer:
To compute the expected return (E(R)), you can use the following formula:
\[ E(R) = \sum_{i=1}^{n} (R_i \times P_i) \]
where \( R_i \) is the possible rate of return and \( P_i \) is the corresponding probability.
For Lauren Computer Company:
\[ E(R) = (-0.60 \times 0.05) + (-0.30 \times 0.20) + (-0.10 \times 0.10) + (0.20 \times 0.30) + (0.40 \times 0.20) + (0.80 \times 0.15) \]
Calculate the values and sum them up to find the expected return.
Explanation:
Certainly! The expected return (E(R)) is a measure that helps estimate the average return on an investment based on the probabilities of different possible outcomes.
For the Lauren Computer Company, we have a set of possible rates of return (\(R_i\)) and their corresponding probabilities (\(P_i\)). To find the expected return, you multiply each rate of return by its probability, then sum up these values.
The formula is:
\[ E(R) = \sum_{i=1}^{n} (R_i \times P_i) \]
In the case of Lauren Computer Company, you'd calculate each term \((R_i \times P_i)\) for the given rates of return and probabilities, then add them together. This gives you an estimate of the average return you can expect based on the distribution of possible rates of return.
