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31 March, 05:55

Darren has the option of investing in either Stock A or Stock B. There is a 45 percent chance that the return on Stock A will be 25 percent, a 25 percent chance it will be 14 percent, and a 30 percent chance it will be 4 percent. There is a 45 percent chance that the return on Stock B will be 30 percent, a 25 percent chance it will be 9 percent, and a 30 percent chance it will be2 percent. What is the expected rates of return on Stock A and Stock B?

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  1. 31 March, 06:04
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    15.95 %

    16.35 %

    Explanation:

    Stock A.

    Given:

    Return expectation r1 = 45%

    Probability expectation p1 = 25%

    Return expectation r2 = 25%

    Probability expectation p2 = 14%

    Return expectation r3 = 30%

    Probability expectation p3 = 4%

    Expected Rate of Return = r1p1 + r2p2 + r3p3 ...

    = (45% x 25%) + (25% x 14%) + (30% x 4%)

    = 11.25% + 3.5% + 1.2%

    = 15.95 %

    Stock B.

    Given:

    Return expectation R1 = 45%

    Probability expectation P1 = 30%

    Return expectation R2 = 25%

    Probability expectation P2 = 9%

    Return expectation R3 = 30%

    Probability expectation P3 = 2%

    Expected Rate of Return = R1P1 + R2P2 + R3P3 ...

    = (45% x 30%) + (25% x 9%) + (30% x 2%)

    = 13.5% + 2.25% + 0.6%

    = 16.35 %
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