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The table in the image provides information about three economic scenarios (Recession, Normal, Boom) and their associated probabilities, as well as the rates of return for a Stock fund and a Bond fund in each scenario. Here’s a breakdown of the dataThe table in the image provides information about three economic scenarios (Recession, Normal, Boom) and their associated probabilities, as well as the rates of return for a Stock fund and a Bond fund in each scenario. Here’s a breakdown of the 

- **Recession (33.3% probability)**: Stock fund return = -7%, Bond fund return = 17%
- **Normal (33.3% probability)**: Stock fund return = 12%, Bond fund return = 7%
- **Boom (33.3% probability)**: Stock fund return = 28%, Bond fund return = -3%

### To calculate the expected returns for both the Stock fund and the Bond fund, we use the formula for **expected return**:

\[
\text{Expected Return} = \sum (\text{Probability of Scenario} \times \text{Return in that Scenario})
\]

#### 1. **Expected return for the Stock fund**:
\[
E(\text{Stock fund}) = (0.333 \times -7\%) + (0.333 \times 12\%) + (0.333 \times 28\%)
\]

#### 2. **Expected return for the Bond fund**:
\[
E(\text{Bond fund}) = (0.333 \times 17\%) + (0.333 \times 7\%) + (0.333 \times -3\%)
\]

Let me calculate that.The expected returns are as follows:

- **Expected return for the Stock fund**: 10.99%
- **Expected return for the Bond fund**: 6.99%

These values represent the average returns you could expect for each fund given the probabilities of the different economic scenarios.

Would you like further details or have any additional questions?

Here are 5 related questions for deeper understanding:
1. How do variance and standard deviation apply to these returns?
2. How can portfolio diversification between these two funds reduce risk?
3. What would be the expected return for a portfolio with 50% in each fund?
4. How does changing the probability of scenarios affect expected returns?
5. What are the risks associated with negative returns in specific scenarios?

**Tip:** When comparing funds, consider both expected return and risk (variance or standard deviation) to make informed investment decisions.

Calculate the expected returns for a Stock fund and a Bond fund based on the given economic scenarios and their probabilities.

Learn how to calculate the expected return for a Stock fund and a Bond fund under different economic conditions such as Recession, Normal, and Boom. This example uses the formula for expected return based on scenario probabilities and their respective rates of return.

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