Question

Considering the world economic outlook for the coming year and estimates of sales and earning for the pharmaceutical industry, you expect the rate of return for Lauren Labs common stock to range between -20 percent and +40 percent with the following probabilities:Probability Possible Returns.10 -.20.15 -.05.20 .10.25 .15.20 .20.10 .40Compute the expected rate of return E(Ri) for Lauren Labs.

Answer 1

The expected rate of return E(Ri) for Lauren Labs is 16.5%

Step-by-step explanation:

The formula to compute the expected rate of return is shown below:

Expected rate of return = (Probability 1 × Possible Returns 1) + (Probability 2 × Possible Returns 2) + (Probability 3 × Possible Returns 3) + (Probability 4 × Possible Returns 4) + (Probability 5 × Possible Returns 5) + (Probability 6 × Possible Returns 6)

= (0.10 × 0.20) + (0.15 × 0.05) + (0.20 × 0.10) + (0.25 × 0.15) + (0.20 × 0.20) + (0.10 × 0.40)

= 2% + 0.75% + 2% + 3.75% + 4% + 4%

= 16.5%