Question

Preston Inc.'s stock has a 25% chance of producing a 30% return, a 50% chance of producing a 12% return, and a 25% chance of producing a -18% return. What is the firm's expected rate of return

Answer 1

Answer:

Expected return = 9%

Explanation:

A portfolio is a collection of assets/ investment. The expected  return on the stock would be the weighted average of all the return of the possible  return weighted according to their probability.

Expected return on portfolio:

E(R) =( Wa*Ra) + (Wb*Rb)  + (Wc*Rc)

R- possible return,W- probability

E(R) = (30%× 0.25) + (12%× 0.5) + (-18%× 0.25) = 9 %

Expected return = 9%

Note that the negative sign in the last possible return  implies a loss.