Exhibit 6-13
USE THE FOLLOWING INFORMATION FOR THE NEXT 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. $\begin{array}{cc}
\text { Probability } & \text { Return } \
\hline 0.10 & -.20 \
0.25 & -.05 \
0.40 & 0.15 \
0.25 & 0.30
\end{array}$
-Refer to Exhibit 6-13. Calculate the expected return for Magnum Oil.
A) 5.0
B) 10.3%
C) 13.7%
D) 17.5%
E) 20.0%

Question

Quizplus · Accepted Answer

The expected return is calculated by multiplying each possible return by its probability and then summing these products. Calculation: $0.10 \times (-0.20) + 0.25 \times (-0.05) + 0.40 \times 0.15 + 0.25 \times 0.30 = -0.02 - 0.0125 + 0.06 + 0.075 = 0.1025$ or 10.25%, which rounds to 10.3%.