Question

An investment's possible payoffs are −10 percent, 10 percent, and 30 percent. The probabilities that these payoffs will occur are 0.30, 0.40, and 0.30, respectively. What is the expected rate of return on the investment?

Answer 1

The expected rate of return on the investment is 10%

Step-by-step explanation:

Expected rate of return is calculated as a weighted average of all possible payoff. It is calculated by multiplying potential payoffs by the chances of occurring and then adding these results.

In this case

Payoffs= −10 percent Probabilities 0.30 (30%)

Payoffs= 10 percent Probabilities 0.40 (40%)

Payoffs= 30 percent Probabilities 0.30 (30%)

Expected rate of return= -10% x 30% + 10% x 40% + 30% x 30%

Expected rate of return= -0.03+0.04 + 0.09=0.1

Expected rate of return= 10%