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%
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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