Probability Distributions and Expected Values

Probability distributions

Expected value, the probability-weighted mean

Portfolio expected returns

From scenarios to decisions

Which properties must a probability distribution satisfy?

A stock has a 20 percent chance of returning 20 percent, a 50 percent chance of 8 percent, and a 30 percent chance of minus 10 percent. What is the expected return?

Why can the expected return differ from the most likely return?

A portfolio holds 50 percent in a stock expected to return 8 percent and 50 percent in a bond expected to return 4 percent. What is the portfolio's expected return?

What does it mean that expectation is linear, and why does it matter for portfolios?

Why does an expected value based on judgment-assigned probabilities deserve skepticism?

What two-word term names the probability-weighted average of a distribution's outcomes? Answer in lowercase.

What one-word term names the property that the expectation of a weighted sum equals the weighted sum of expectations? Answer in lowercase.

What two-word analysis technique builds scenarios with probabilities and computes probability-weighted outcomes to summarize a plan? Answer in lowercase.

A portfolio's asset weights, expressed as fractions, must sum to what number? Write the number.