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Sell Inc.'s stock has a 25 percent chance of producing a 30% return, a 50 percent chance of producing a12% return, and a 25 percent chance of producing a 5% return. What is the firm's expected rate of return?

Respuesta :

Shahzaibfaraz

Answer:

r = 0.1475 or 14.75%

Explanation:

The expected rate of return or r is the average return that is expected from the stock. It is the expected rate of profit or loss that an investor can anticipate on an investment whose returns are known or anticipated.

The expected rate of return of can be calculated as follows,

r = pA * rA  +  pB * rB + ... + pN * rN

Where,

  • pA, pB and so on represents the probability of an event or return occuring
  • rA, rB and so on are the return in different events

r = 0.25 * 0.3  +  0.5 * 0.12  +  0.25 * 0.05

r = 0.1475 or 14.75%

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