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Consider the following probability distribution of returns for Alpha Corporation:
-Suppose an investment is equally likely to have a 35% return or a -20% return.The expected return for this investment is closest to:
A)7.5%.
B)15%.
C)5%.
D)10%.

Question

Use the table for the question(s)below.
Consider the following probability distribution of returns for Alpha Corporation: 
-Suppose an investment is equally likely to have a 35% return or a -20% return.The expected return for this investment is closest to:
A)7.5%. 
B)15%. 
C)5%. 
D)10%.

Quizplus · Accepted Answer

The expected return is the average return that you can expect to receive from an investment. It is calculated by multiplying the probability of each possible return by the amount of that return, and then adding up the results. In this case, the probability of a 35% return is 50%, and the probability of a -20% return is also 50%. So, the expected return is (0.5 * 0.35) + (0.5 * -0.20) = 0.075, or 7.5%.

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