Given the following probability distributions, what are the expected returns for the Market and for Security J?
A) 10.0%; 11.3%
B) 9.5%; 13.0%
C) 10.0%; 9.5%
D) 10.0%; 13.0%
E) 13.0%; 10.0%

Question

Given the following probability distributions, what are the expected returns for the Market and for Security J? 
A) 10.0%; 11.3% 
B) 9.5%; 13.0% 
C) 10.0%; 9.5% 
D) 10.0%; 13.0% 
E) 13.0%; 10.0%

Quizplus · Accepted Answer

To find the expected return for the market, we need to take the weighted average of the returns for each state of the economy, using the probabilities as weights:
E(Rm) = 0.2 x 8% + 0.5 x 10% + 0.3 x 12% = 10%
To find the expected return for Security J, we also need to take the weighted average of the returns for each state of the economy, using the probabilities as weights:
E(Rj) = 0.2 x 5% + 0.5 x 11% + 0.3 x 17% = 13%
Therefore, the correct answer is D) 10.0%; 13.0%.

Given the Following Probability Distributions, What Are the Expected Returns