USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
A financial analyst covering Magnum Oil has determined the following four possible returns given four different states of the economy over the next period.

-Refer to Exhibit 6.13. Calculate the expected return for Magnum Oil.
A) 5.0 percent
B) 10.3 percent
C) 13.7 percent
D) 17.5 percent
E) 20.0 percent

Question

USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
A financial analyst covering Magnum Oil has determined the following four possible returns given four different states of the economy over the next period.
 
-Refer to Exhibit 6.13. Calculate the expected return for Magnum Oil.
A) 5.0 percent 
B) 10.3 percent 
C) 13.7 percent 
D) 17.5 percent 
E) 20.0 percent

Quizplus · Accepted Answer

To calculate the expected return for Magnum Oil, we take the weighted average of the possible returns, weighted by the probability of each state of the economy. So, the expected return is (0.1 x 4%) + (0.3 x 10%) + (0.4 x 16%) + (0.2 x 25%), which equals 10.3%. Therefore, the best choice is option B, which is the expected return for Magnum Oil.