Q: This question relates to content of Session 1 and is based on the following Consider a model for describing a random return on Stock C next week, RC. According to this model, RC can be described using the following 5 scenarios. You can find these data in the posted file Stock C.xlsx.
or
Q: This question relates to content of Session 1 and is based on the following Consider a model for describing a random return on Stock C next week, RC. According to this model, RC can be described using the following 5 scenarios. You can find these data in the posted file Stock C.xlsx.
| Scenario | RC Value | Probability of Scenario |
| 1 | -0.01 | 0.1 |
| 2 | -0.03 | 0.2 |
| 3 | 0.01 | 0.4 |
| 4 | 0.02 | 0.2 |
| 5 | 0.04 | 0.1 |
What is the expected value of the return on Stock C next week, i.e., what is the value of E[RC]? Choose the closest from the answers below.
- 0.000
- 0.010
- .005
- -0.005
- 0.015
- 0.020
Explanation: The expected value E[RC]E[RC] is a weighted average of all possible returns, where each return is weighted by the probability of its occurrence. In this case, after calculating the contributions from each scenario and summing them, we found that the expected return is 0.0050.005, indicating a slight expected gain in the return on Stock C next week.
