Given the following probability distributions, what are the expected returns for the Market and for Security J?

Question

Quizplus · Accepted Answer

To calculate expected return, we multiply the probability of each outcome by its respective return, and then sum them up. For the market, we have:

Expected return for Market = (0.1*10%) + (0.2*12%) + (0.4*8%) + (0.2*5%) + (0.1*0%) 
= 1% + 2.4% + 3.2% + 1% + 0% 
= 7.6%

And for Security J, we have:

Expected return for Security J = (0.05*10%) + (0.15*8%) + (0.4*12%) + (0.3*14%) + (0.1*6%) 
= 0.5% + 1.2% + 4.8% + 4.2% + 0.6% 
= 11.3%

Therefore, the correct answer is D, with an expected return of 10.0% for the Market and 13.0% for Security J.

Given the Following Probability Distributions, What Are the Expected Returns