Question

A project has 70% probability of doubling your investment in a year and 30% probability of halving your investment in a year. What is the expected rate of return on this investment

Answer 1

Answer:

1.55

Explanation:

When the investment is doubled the return would be 100% and when it is halved, the return would be -50%.

Probability Return

70%             2*100 = 200

30%             0.5*100 = 50

Expected Return = Probability of Doubling Investment*Rate of Return on Doubling of Investment + Probability of Halving Investment*Rate of Return on Halving of Investment

Expected Return = 70%*200% + 30%*50%

Expected Return = 0.7*200% + 0.3*50%

Expected Return = 1.4 + 0.15

Expected Return = 1.55