Question

Dothan 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:

Therefore, the firm's expected rate of return is 9%.

Explanation:

The expected rate of return of an investment refers to the profit or loss which an investors is anticipating to receive from the investment at a specified rate of return.

The expected rate of return is estimated by totaling the product of potential outcomes and the chances of the outcomes occurring.

For Dothan Inc.'s stock therefore, the expected rate of return can be estimated as follows:

Expected rate of return = (25% * 30%) + (50% * 12%) - (25% * 18%) = 9%

Therefore, the firm's expected rate of return is 9%.