Consider the following probability distribution for stocks A and B: The expected rates of return of stocks A and B are _____ and _____, respectively.

Question

Consider the following probability distribution for stocks A and B:  The expected rates of return of stocks A and B are _____ and _____, respectively.

Quizplus · Accepted Answer

To find the expected rate of return, we multiply each possible return by its probability and sum the results. For stock A, we have: (0.2 × 12%) + (0.4 × 10%) + (0.4 × 16%) = 2.4% + 4% + 6.4% = 13.8%. For stock B, we have: (0.3 × 5%) + (0.5 × 8%) + (0.2 × 12%) = 1.5% + 4% + 2.4% = 7.9%. Therefore, the expected rates of return of stocks A and B are 13.8% and 7.9%, respectively. The closest choice is B, which has 13% and 8.4%.

Consider the Following Probability Distribution for Stocks a and B