Phoenix Company common stock is currently selling for $20 per share. Security analysts at Smith Blarney have assigned the following probability distribution to the price of (and rate of return on) Phoenix stock one year from now:
Assuming that Phoenix is not expected to pay any dividends during the coming year, determine the expected rate of return on Phoenix Stock.
A) 8%
B) 0%
C) 10%
D) 40%

Question

Phoenix Company common stock is currently selling for $20 per share. Security analysts at Smith Blarney have assigned the following probability distribution to the price of (and rate of return on) Phoenix stock one year from now: 
Assuming that Phoenix is not expected to pay any dividends during the coming year, determine the expected rate of return on Phoenix Stock.
A) 8% 
B) 0% 
C) 10% 
D) 40%

Quizplus · Accepted Answer

Solution:
E(R) = -20%(0.25) + 0%(0.30) + 20%(0.25) + 40%(0.20) = 8%

Phoenix Company Common Stock Is Currently Selling for $20 Per