Returns Expected Return -the return that an investor expects to earn on an asset given its price, growth potential, etc. Required return -the return that an investor requires on an asset given its risk and market interest rates
Returns • Expected Return - the return that an investor expects to earn on an asset, given its price, growth potential, etc. • Required Return - the return that an investor requires on an asset given its risk and market interest rates
Expected Return State of Probability Return Economy (P) Orl Utility Orl. Tech Recession 20 10% Normal 50 100 14 Boom 30 14 30 For each firm, the expected return on the stock is just a weighted average:
Expected Return State of Probability Return Economy (P) Orl. Utility Orl. Tech Recession .20 4% -10% Normal .50 10% 14% Boom .30 14% 30% For each firm, the expected return on the stock is just a weighted average:
Expected Return State of Probability Return Economy (P) Orl Utility Orl. Tech Recession 20 10% Normal 50 100 140 Boom 30 14 30 For each firm, the expected return on the stock is just a weighted average: k=P(k1)“k1+P(k2)“k2+…+P(kn)2kn
Expected Return State of Probability Return Economy (P) Orl. Utility Orl. Tech Recession .20 4% -10% Normal .50 10% 14% Boom .30 14% 30% For each firm, the expected return on the stock is just a weighted average: k = P(k1)*k1 + P(k2)*k2 + ...+ P(kn)*kn
Expected Return State of Probability Return Economy (P) Orl Utility Orl. Tech Recession 20 10% Normal 50 100 140 Boom 30 14 30 k= P(k1)*k1+ P(k2 )k2+.+ P(kn)"kn k(OU=,2(4%)+.5(10%)+.3(14%)=10%
Expected Return State of Probability Return Economy (P) Orl. Utility Orl. Tech Recession .20 4% -10% Normal .50 10% 14% Boom .30 14% 30% k = P(k1)*k1 + P(k2)*k2 + ...+ P(kn)*kn k (OU) = .2 (4%) + .5 (10%) + .3 (14%) = 10%
Expected Return State of Probability Return Economy (P) Orl Utility Orl. Tech Recession 20 10% Normal 50 100 140 Boom 30 14 30 k= P(k1)*k1+ P(k2 )k2+.+ P(kn)"kn k(OD=.2(-10%)+.5(14%)+3(30%)=14%
Expected Return State of Probability Return Economy (P) Orl. Utility Orl. Tech Recession .20 4% -10% Normal .50 10% 14% Boom .30 14% 30% k = P(k1)*k1 + P(k2)*k2 + ...+ P(kn)*kn k (OI) = .2 (-10%)+ .5 (14%) + .3 (30%) = 14%