Consider the following probability distribution for stocks A and B: $$\begin{array} { c c c c }
\text { State } & \text { Probability } & \text { Return on Stock A} & \text { Return on Stock B } \
1 & 0.10 & 10 \% & 8 \% \
2 & 0.20 & 13 \% & 7 \% \
3 & 0.20 & 12 \% & 6 \% \
4 & 0.30 & 14 \% & 9 \% \
5 & 0.20 & 15 \% & 8 \% \
\hline
\end{array}$$ The expected rates of return of stocks A and B are _____ and _____, respectively.

Question

Consider the following probability distribution for stocks A and B: $$\begin{array} { c c c c } 
\text { State } & \text { Probability } & \text { Return on Stock A} & \text {  Return on Stock B } \
1 & 0.10 & 10 \% & 8 \% \
2 & 0.20 & 13 \% & 7 \% \
3 & 0.20 & 12 \% & 6 \% \
4 & 0.30 & 14 \% & 9 \% \
5 & 0.20 & 15 \% & 8 \% \
\hline
\end{array}$$ The expected rates of return of stocks A and B are _____ and _____, respectively.

Quizplus · Accepted Answer

The expected return is calculated by multiplying each return by its probability and summing the results. For Stock A: (0.10*10% + 0.20*13% + 0.20*12% + 0.30*14% + 0.20*15%) = 13.2%. For Stock B: (0.10*8% + 0.20*7% + 0.20*6% + 0.30*9% + 0.20*8%) = 7.7%.

Consider the Following Probability Distribution for Stocks a and B