Consider the following probability distribution for stocks C and D: $\begin{array}{cccc}
\text { State } & \text { Probability } & \text { Return on Stock C} & \text { Return on Stock D } \
1 & 0.30 & 7\% & -9\% \
2 & 0.50 & 11\% & 14\% \
3 & 0.20 & -16\% & 26\%
\end{array}$
The expected rates of return of stocks C and D are _____ and _____, respectively.
A) 4.4%; 9.5%
B) 9.5%; 4.4%
C) 6.3%; 8.7%
D) 8.7%; 6.2%
E) None of the options are correct.

Question

Consider the following probability distribution for stocks C and D: $\begin{array}{cccc}
\text { State } & \text { Probability } & \text { Return on Stock C} & \text { Return on Stock D } \
1 & 0.30 & 7\% & -9\% \
2 & 0.50 & 11\% & 14\% \
3 & 0.20 & -16\% & 26\%
\end{array}$
 The expected rates of return of stocks C and D are _____ and _____, respectively.
A) 4.4%; 9.5%
B) 9.5%; 4.4%
C) 6.3%; 8.7%
D) 8.7%; 6.2%
E) None of the options are correct.

Quizplus · Accepted Answer

The expected rate of return for a stock is calculated by multiplying each possible return by its probability and then summing these products. For Stock C: $E(R_C) = 0.30(7\%) + 0.50(11\%) + 0.20(-16\%) = 2.1\% + 5.5\% - 3.2\% = 4.4\%$. For Stock D: $E(R_D) = 0.30(-9\%) + 0.50(14\%) + 0.20(26\%) = -2.7\% + 7\% + 5.2\% = 9.5\%$.

Consider the Following Probability Distribution for Stocks C and D