Ted McGovern works in the economics branch of a government bank regulator. When he arrives at work this morning and checks his voicemail, he has a message from the Regional Director asking him to calculate the expected rate of return for a stock market series. More detailed information will be forthcoming in an e-mail. Fortunately, McGovern still has his CFA Program study guides in his office and finds the correct formulas. McGovern logs on to the computer network and downloads an attachment that contains the following estimates:
Overall Assumptions:
Index Estimates "" Bull Market:
Index Estimates "" Bear Market:
The expected return on the index is closest to:
Click on the arrows to vote for the correct answer
A. B. C. D.C
To calculate the expected index return, we need to calculate the expected return for the bull market and the expected return for the bear market. Then, we will use the given probabilities of each scenario to calculate the expected index return. Note: All amounts are in millions of $ unless noted otherwise.
BULL MARKET -
BEAR MARKET -
EXPECTED VALUE OF INDEX -
= 0.35 * 110% + 0.65 * -11.8% =30.83%