Question

Monmouth Inc.'s stock has a 30% chance of producing a 20% return, a 30% chance of producing a 10% return, and a 40% chance of producing a -10% return. What is the firm's expected rate of return?

Answer 1

Answer:

5%

Explanation:

The expected rate of return is the weighted average of all the possible returns associated with an investment decision. The returns are weighted using the probability associated with their outcomes.

Expected return = WaRa + Wb+Rb + Wn+Rn

W- weight of the outcome, R - return of the outcome

=(0.3× 20%) + (0.3× 10%) + (0.4 × -10%)

  = 5%

Answer 2

Answer:

Expected rate of return is 13%

Explanation:

Using the expected values method:

Expected Rate of return = Chance 1 * Outcome 1  + Chance 2 * Outcome 2 + Chance 3 * Outcome 3 + ................... Chance n * Outcome n

So by putting values, we have:

Expected Rate of return = 30% * 20% + 30% * 10% + 40% * 10%

Expected Rate of return = 6% + 3% + 4% = 13%

So the expected rate of return using the expected value method is 13%