Question

As the manager of High Speed Records, you have signed a new artist to the label. There are three different outcomes for investing in the artist. What is the expected return on investment using the information below?Outcome Probability Return1. .35 .202. .25 .363. .40 .10

Answer 1

Answer:

0.2 or 20%

Explanation:

The three possible outcomes, with respective probabilities and returns, as follows

Outcome 1: Probability (P) = 0.35, Return (R) = 0.20

Outcome 2: Probability = 0.25, Return = 0.36

Outcome 3: Probability = 0.40, Return = 0.10.

The expected return will be computed as follows.

Expected Return = $(P_{1} *R_{1}) + (P_{2} *R_{2}) + (P_{3} *R_{3})$

= (0.35*0.20) + (0.25*0.36) + (0.40*0.10)

= 0.07 + 0.09 + 0.04

= 0.2

Therefore expected return = 0.2 or 20%