If an investment is equally likely to return 10 percent per year or 15 percent a year, then its average expected rate of return is
A) 10.5 percent.
B) 11.0 percent.
C) 11.5 percent.
D) 12.5 percent.

Question

Quizplus · Accepted Answer

The average expected rate of return is calculated by taking the sum of the possible returns, each multiplied by their probability. Here, both returns are equally likely, so the expected return is (0.5 * 10%) + (0.5 * 15%) = 12.5%.

If an Investment Is Equally Likely to Return 10 Percent