Question

For the coming year, Stock A has a 10% chance of losing 25%, a 20% chance of making 6%, a 60% chance of making 25% and a 10% chance of making 50%. What is Stock A’s expected return?

• A. 14.00%

• B. 18.70%

• C. 23.70%

• D. 26.50%

If a stock has a 30% chance of losing 18%, a 40% chance of losing only 3%, and a 30% chance of making 15%, what is the expected return of this stock?

• A. -2.10%

• B. 7.25%

• C. -7.25%

• D. 11.10%

Answer 1

The expected return is computed as shown below:

= Prob of 10% x - 0.25 + Prob of 20% x 0.06 + Prob of 60% x 0.25 + Prob of 10% x 0.50

= 0.10 x - 0.25 + 0.20 x 0.06 + 0.60 x 0.25 + 0.10 x 0.50

= 18.70%

So, the correct answer is option B.

The expected return is computed as shown below:

= Prob of 30% x - 0.18 + Prob of 40% x - 0.03 + Prob of 30% x 0.15

= 0.30 x - 0.18 + 0.40 x - 0.03 + 0.30 x 0.15

= - 2.10%

So, the correct answer is option A.

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