Question

The following information is for the next three problems. Use a calculator, not Excel, as you will need to on an exam. Over the last four calendar years, the 1-year holding period total returns (i.e., annual returns) for Coca-Cola common stock (ticker symbol KO) were:

a.2019:20.61%
b.2020:2.48%
c.2021:11.37%
d.2022:10.61%

Answer 1

The expected profit for the $1,000 stock investment is calculated by multiplying each outcome by its probability and summing these values together, which provides an average expectation over time, not a guaranteed outcome.

Step-by-step explanation:

The question is asking to find the expected profit after one year for an individual who invests $1,000 in a company's stock with certain probabilities for different outcomes. The calculation for expected profit involves multiplying each potential outcome by its probability and then summing these together. Specifically, there is a 35% chance of losing $1,000, a 60% chance of breaking even (with no profit or loss), and a 5% chance of gaining $10,000.

The expected profit calculation would be:

• (-1000 * 0.35) for the potential loss,
• (0 * 0.60) for breaking even, and
• (10000 * 0.05) for the potential gain.

Adding these up gives us the expected profit. It is important to recognize that this does not guarantee the actual outcome but gives an average expectation of profit or loss over time assuming many such investments are made under similar probabilities.