Suppose there's an 80% chance of a stock rising by 20% and a 20% chance of it falling by 40%.What is the expected rate of return on the stock?
A) -40%
B) -20%
C) 8%
D) 16%

Question

Quizplus · Accepted Answer

To calculate the expected rate of return, we need to take the weighted average of the possible outcomes based on their probabilities.

Expected return = (0.8 x 20%) + (0.2 x -40%) = 16% - 8% = 8%

Therefore, the expected rate of return on the stock is 8%.

Suppose There's an 80% Chance of a Stock Rising by 20