Question

You have been given this probability distribution for the holding period return for KMP Stock State of the Economy Boom Normal Recession
What is the expected holding period return for KMP stock?
Probability 30 .50 20 HPR 18% 12% 5%
a) 10.40%
b) 9.32%
c) 11.63%
d) 11.54%
e) 10.66%
f) 10.88%

Answer 1

Answer: The answer is a

Explanation:

Using the formula

Expected Rate of Return = ∑(i =1 to n) Ri Pi

Where Ri = Return in scenario 1

Pi = Probability for the return in scenario 1

i = Number of scenario

n = Total number of probability and Return

P1=30

R1 = 18

P2 = 50

R2 =12

P3 = 20

R3 =-5

Expected Gain =(30 ×18) + (50 × 12) + ( 20 × -5)

= 540 + 600 + - 100

= 1,040

= 1,040 ÷ 100

= 10.4%