Question

The table gives the probability distribution of the annual rate of return on the stock of MN Company, Inc. What is the expected value of the rate of return?

Annual Return
20%
15%
10%
Probablity
0.5
0.3
0.2
• A. 10%
• в. 16.5%
О с. 22.5%
O D.45%

Answer 1

The expected value of the annual rate of return for MN Company, Inc. is calculated by multiplying each potential return by its probability and then summing these products. The result is a 16.5% expected annual return. Therefore correct option is B

Step-by-step explanation:

The question asks us to find the expected value of the annual rate of return for MN Company, Inc. based on its probability distribution. To calculate this, we multiply each potential return by its probability and sum these products. Here is the step-by-step calculation:

• (20% × 0.5) + (15% × 0.3) + (10% × 0.2)
• (0.20 × 0.5) + (0.15 × 0.3) + (0.10 × 0.2)
• (0.10) + (0.045) + (0.020)
• 0.165 or 16.5%

Therefore, the expected value of the rate of return is 16.5%.