Question

Analysts predict that over the next year, Thete, Inc.’s common stock has a 30% chance of returning 20%, a 40% chance of returning 12%, and a 30% chance of returning 8%. What is the expected rate of return on Thete, Inc.’s common stock? Submit your answer as a percentage and round to two decimal places.

1. Describe and interpret the assumptions related to the problem.
2. Apply the appropriate mathematical model to solve the problem.
3. Calculate the correct solution to the problem

Answer 1

Expected rate of return will always be weighted average return of probabilities.

Expected rate of return= (.3*20%)+(.4*12%)+(.3*8%)

=(6+4.8+2.4)

= 13.20%

Expected rate of return of company is 13.20%

A. Assumptions related to this model is that expected rate of return will be calculated on the basis of the probabilities in different scenarios and they will be summarised in order to arrive at the overall expected rate of return.

II. we will be using the expected rate of return formula which will be used in relation to the probabilities

III. Expected rate of return will be 13.20%.