Question

An intvestment has a 35% chance of producing a 25% retum, a 45% chance of producing an 4% return, and a 20% chance of producing a −15% retum. What is its expected return?

a) 7.55%
b) 4%
c) −6.75%
d) None of these are correct
e) 10%

Answer 1

The expected return of the investment with a 35% chance of producing a 25% return, a 45% chance of a 4% return, and a 20% chance of a -15% return is 7.55%, which makes the correct option 'a) 7.55%'.

Step-by-step explanation:

To calculate the expected return of the investment, we have to multiply the potential returns by their respective probabilities and add them together. The formula for expected return is:

Expected return = (Probability of Return 1 x Return 1) + (Probability of Return 2 x Return 2) + ... + (Probability of Return n x Return n)

In this case, the expected return would be calculated as follows:

• (0.35 x 25%) + (0.45 x 4%) + (0.20 x -15%)
• = (0.35 x 0.25) + (0.45 x 0.04) + (0.20 x -0.15)
• = 0.0875 + 0.018 - 0.03
• = 0.0755 or 7.55%

Therefore, the expected return of the investment is 7.55%, and the correct option is a) 7.55%.