What is the expected return on a stock that has a 15.0% probability of a 35.0% return, a 20.0% probability of a 25.0% return, a 50.0% probability of a 15.0% return, and a 15.0% probability of a -20.0% return?
A)18.75%
B)14.75%
C)13.75%
D)20.75%

Question

Quizplus · Accepted Answer

To calculate the expected return, we need to multiply the probability of each potential return by its corresponding return, and then add them all together.

Expected return = (0.15 * 0.35) + (0.20 * 0.25) + (0.50 * 0.15) + (0.15 * (-0.20)) 
Expected return = 0.0525 + 0.05 + 0.075 - 0.03 
Expected return = 0.1475 or 14.75%

Therefore, the best choice is B, as it is the only answer option that matches the calculated expected return.

What Is the Expected Return on a Stock That Has