Consider the following probability distribution for stocks C and D: $$\begin{array} { c c c c }
\text { State } & \text { Probability } & \text { Return on Stock C } & \text { Return on Stock D } \
1 & 0.30 & 7 \% & - 9 \% \
2 & 0.50 & 11 \% & 14 \% \
3 & 0.20 & - 16 \% & 26 \%
\end{array}$$ The expected rates of return of stocks C and D are _____ and _____, respectively.
A) 4.4%; 9.5%
B) 9.5%; 4.4%
C) 6.3%; 8.7%
D) 8.7%; 6.2%
E) None of the options are correct.

Question

Consider the following probability distribution for stocks C and D: $$\begin{array} { c c c c } 
\text { State } & \text { Probability } & \text { Return on Stock C } & \text { Return on Stock D } \
1 & 0.30 & 7 \% & - 9 \% \
2 & 0.50 & 11 \% & 14 \% \
3 & 0.20 & - 16 \% & 26 \%
\end{array}$$ The expected rates of return of stocks C and D are _____ and _____, respectively.
A) 4.4%; 9.5%
B) 9.5%; 4.4%
C) 6.3%; 8.7%
D) 8.7%; 6.2%
E) None of the options are correct.

Quizplus · Accepted Answer

The expected rate of return is the weighted average of the possible returns, where the weights are the probabilities of each return. For stock C, the expected rate of return is (0.30 * 7%) + (0.50 * 11%) + (0.20 * -16%) = 4.4%. For stock D, the expected rate of return is (0.30 * -9%) + (0.50 * 14%) + (0.20 * 26%) = 9.5%.

Consider the Following Probability Distribution for Stocks C and D