Maria sees the growth of her business for the upcoming year as being tied to the gross domestic product (GDP). She believes that her business will grow (or contract) at the rate of 5%, 4.5%, 3%, 0%, or - 0.5% per year if the GDP grows (or contracts) at the rate of between 2 and 2.5%, between 1.5 and 2%, between 1 and 1.5%, between 0 and 1%, and between - 1 and 0%, respectively. Maria has decided to assign a probability of 0.13, 0.24, 0.39, 0.19, and 0.05, respectively, to each outcome. At what rate does Maria expect her business to grow next year?

Question

Quizplus · Accepted Answer

To find the expected growth rate, we need to calculate the weighted average of the growth rates, where the probabilities are the weights.

Expected growth rate = (0.13 x 5%) + (0.24 x 4.5%) + (0.39 x 3%) + (0.19 x 0%) + (0.05 x -0.5%)

Expected growth rate = 0.65% + 1.08% + 1.17% + 0% - 0.025%

Expected growth rate = 2.875%

Therefore, Maria expects her business to grow at a rate of 2.875% next year. 
The answer is (C).

Maria Sees the Growth of Her Business for the Upcoming