Question

Assume that an investment is forecasted to produce the followingâ returns:

-aâ 10% probability of aâ $1,400 return;

-aâ 50% probability of aâ $6,600 return;

-aâ 40% probability of aâ $1,500 return.

What is the expected amount of return this investment willâ produce?

Answer 1

$4,040

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)

= (0.10 × $1,400) + (0.50 × $6,600) + (0.40 × $1,500)

= $140 + $3,300 + $600

= $4,040

Simply we multiplied the probabilities with this return so that the correct amount of return would be come