Jacob is holding an investment he bought for $1,000 that has a 60 percent chance of gaining $200 in value and a 40 percent chance of losing $40. Jacob's average expected rate of return on this
Investment is
A) 8 percent.
B) 10.4 percent.
C) 12.2 percent.
D) 24 percent.

Question

Quizplus · Accepted Answer

To calculate the expected rate of return, we need to multiply the possible outcomes by their probabilities and then add them together.

(0.6 x $200) + (0.4 x -$40) = $120 - $16 = $104

Then, we divide the expected return by the initial investment and express it as a percentage.

$104 / $1,000 = 0.104

So the answer is B, 10.4 percent.

Jacob Is Holding an Investment He Bought for $1,000 That