Consider the following probability distribution for stocks A and B: $\begin{array}{cccc}
\text { State } & \text { Probability } & \text { Return on Stock A}& \text { Return on Stock E } \
1 & 0.10 & 10 \% & 8 \% \
2 & 0.20 & 138 & 78 \
3 & 0.20 & 128 & 68 \
4 & 0.30 & 148 & 98 \
5 & 0.20 & 158 & 8 \%
\end{array}$
The expected rates of return of stocks A and B are _____ and _____, respectively.
A) 13.2%; 9%
B) 14%; 10%
C) 13.2%; 7.7%
D) 7.7%; 13.2%

Question

Consider the following probability distribution for stocks A and B: $\begin{array}{cccc}
\text { State } & \text { Probability } & \text { Return on Stock A}& \text { Return on Stock E } \
1 & 0.10 & 10 \% & 8 \% \
2 & 0.20 & 138 & 78 \
3 & 0.20 & 128 & 68 \
4 & 0.30 & 148 & 98 \
5 & 0.20 & 158 & 8 \%
\end{array}$ 
 The expected rates of return of stocks A and B are _____ and _____, respectively.
A) 13.2%; 9%
B) 14%; 10%
C) 13.2%; 7.7%
D) 7.7%; 13.2%

Quizplus · Accepted Answer

The expected rate of return for each stock is calculated by multiplying the return in each state by the probability of that state and then summing these products. For Stock A: $E(R_A) = 0.10 \times 10\% + 0.20 \times 138\% + 0.20 \times 128\% + 0.30 \times 148\% + 0.20 \times 158\% = 1\% + 27.6\% + 25.6\% + 44.4\% + 31.6\% = 130.2\%$. Since the calculation seems to be incorrect due to the misinterpretation of percentages and actual numbers, let's correct the approach: For Stock A, assuming the percentages are correct and the numbers without '%' are misprints or vice versa, the calculation would differ. However, without clear correction of the given data, we proceed with the assumption that all returns are intended to be percentages, making the calculation for expected returns incorrect as presented. For Stock B, the correct calculation involves percentages, but without clear values for all states, an accurate calculation cannot be provided. The correct choice should be based on the correct calculation of expected returns, which cannot be accurately determined from the provided information. The selection of "C" is based on the assumption of a correct calculation that cannot be verified with the given data.

Consider the Following Probability Distribution for Stocks a and B