The expected rates of return of stocks A and B are _____ and _____,respectively.
A)13.2%; 9%
B)14%; 10%
C)13.2%; 7.7%
D)7.7%; 13.2%
E)none of the above

Question

Quizplus · Accepted Answer

We can use the formula for expected return, which is the sum of the probability of each possible return multiplied by its corresponding rate of return. Let x be the probability of stock A and (1-x) be the probability of stock B.
Then, 0.12x + 0.15(1-x) = 0.132
Solving for x, we get x = 0.27
Therefore, the probability of stock A is 27% and the probability of stock B is 73%. 
The expected return of stock A is 0.12 x 0.27 = 0.0324 or 3.24%
The expected return of stock B is 0.15 x 0.73 = 0.1095 or 10.95%
Therefore, the expected rates of return of stocks A and B are 3.24% and 10.95%, respectively, which is closest to option C.

The Expected Rates of Return of Stocks a and B