4. Statistical measures of stand-alone risk Remember, the expected value of a probability distribution is a statistical measure of the average (mean) value expected to occur during all possible eircumstances. To compute an asset's expected retum under a range of possible circumstances (or states of nature), multiply the anticipated return expected to result during each state of nature by its probability of occurrence. Consider the following case: Tyer owns a two-stock portfolio that invests in Falcon Freight Company (FF) and Pheasant Mining (PP). Three-quarters of Tyler's portfollo value consists of FF's shares, and the balance consists of PP's thares. Each stock's expected return for the next year will depend on forecasted market conditions. The expected returns from the stocks in different market conditions are detalled in the following toble: Calculate expected returns for the individual stocks in Tyler's portfolio as well as the expected rate of return of the eatice portfolio over the three possble market conditicns next year. - The expected rate of refum an Falcon Freight's stock over the nert year is - The expected rate of return on Pheasant Mining's stock over the next year is - The expected rate of return on Tyer's portfolio over the next year is The expected returns for Tyler's portfolio were calculated based on three possible conditions in the market. Such conditions will vary from time to time, and for each condition there will be a specific outcome. These probabilities and outcomes can be represented in the form of a continuous probability distribution graph. For example, the continuous probablity distributions of rates of return on stocks for two different companies are shown on the following graph: Based on the graph's information, which company's returns exhibit the greater risk? Company H Company G