Question

Central Metals, Inc. is considering investing in a silver mine. An investment of $500,000 would be made for one year with the following potential outcomes: What's the expected rate of return? Rate of Return Probability of Outcome 150% .10 60% .25 35% .50 (100%) .15 15.2% 120% 50% 32.5%

Answer 1

The expected rate of return is 32.5%

Step-by-step explanation:

The expected rate of return is equal to the sum of all the outcomes. So, in order to obtain the rate of return, you have to multiply each possible outcome by its probability of occurrence. Note that the sum of
`0.10 + 0.25 + 0.50 + 0.15 = 1 = 100%`, that means that the probability of all outcomes has to sum 100%.

The result of each outcome multiplied by its probability is:

• 
  `150% * 0.10 = 0.15`
• 
  `60% * 0.25 = 0.15`
• 
  `35% * 0.50 = 0.175`
• 
  `(100%) * 0.15 = (0.15)`

The result of the sum of those calculations is equal to 0.325, or 32.5%.