Consider a stock that has a 40 percent chance of a return of 5 percent, and a 60 percent change of a return of 10 percent. The expected return, based on this probability distribution, is closest to:
A) 7 percent.
B) 7.5 percent.
C) 8 percent.

Question

Quizplus · Accepted Answer

The expected return is calculated by multiplying each possible return by its probability and then summing these products. So, (0.40 * 5%) + (0.60 * 10%) = 2% + 6% = 8%.

Consider a Stock That Has a 40 Percent Chance of a Return