Question

What is the expected return for the following stock? (State your answer in percent with one decimal place.)

Outcomes Possible returns Probability
better 33% 14%
same 28% 37%
worse 12% 49%

Answer 1

The expected return on the stock, considering the different outcomes and their associated probabilities, is calculated to be 20.9%.

Step-by-step explanation:

The expected return for the stock given the possible outcomes and their probabilities is calculated by multiplying each possible return by its probability and then summing those products. The formula is: Expected Return = (Return1 × Probability1) + (Return2 × Probability2) + (Return3 × Probability3).

In this case: Expected Return = (0.33 × 0.14) + (0.28 × 0.37) + (0.12 × 0.49) = 0.0462 + 0.1036 + 0.0588 = 0.2086 or 20.9%

Thus, the expected return on this stock, expressed in percentage to one decimal place, is 20.9%.