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Hi P4 Tutor,
I don’t understand the b part of example 3 of Chapter 9 in OT notes (page 36). Why overall return is 15% for each?
Thanks,
QinHi Quin
To get the average return you calculate the weighted average (the same arithmetic as when you had to calculate the expected value of things in Paper F9). You do this by multiplying the returns by the probabilities and adding up.
So for ‘ice-cream’ it is (1/3 x 20%) + (1/3 x 15%) + (1/3 x 10%) = 15%
(You might find it useful to watch my free lecture when I go through this example (and the others as well) on the screen).
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