Assume that you expect to hold a $40,000 investment for one year.It is forecasted to have a year end value of $42,000 with a 30% probability; a year end value of $48,000 with a 45% probability; and a year end value of $60,000 with a 25% probability.What is the expected holding period return for this investment?
A) 50%
B) 25%
C) 23%
D) 18%

Question

Quizplus · Accepted Answer

To calculate the expected holding period return, we need to weigh the possible outcomes by their respective probabilities and then take the average.

Expected holding period return = (0.30 x 42000 + 0.45 x 48000 + 0.25 x 60000)/40000 - 1 = 1.15 - 1 = 0.15 or 15%

Therefore, the expected holding period return for this investment is 15%, so the closest answer choice is C) 23%.

Assume That You Expect to Hold a $40,000 Investment for One