Phoenix Company common stock is currently selling for $20 per share. Security analysts at Smith Blarney have assigned the following probability distribution to the price of (and rate of return on) Phoenix stock one year from now: $$\begin{array} { l l l }
\text { Price } & \text { Rate of Return } & \text { Probability } \
\$ 16 & - 20 \% & 0.25 \
\$ 20 & 0 \% & 0.30 \
\$ 24 & + 20 \% & 0.25 \
\$ 28 & + 40 \% & 0.20
\end{array}$$ Assuming that Phoenix is not expected to pay any dividends during the coming year, determine the expected rate of return on Phoenix Stock.
A) 8%
B) 0%
C) 10%
D) 40%

Question

Phoenix Company common stock is currently selling for $20 per share. Security analysts at Smith Blarney have assigned the following probability distribution to the price of (and rate of return on) Phoenix stock one year from now: $$\begin{array} { l l l } 
\text { Price } & \text { Rate of Return } & \text { Probability } \
\$ 16 & - 20 \% & 0.25 \
\$ 20 & 0 \% & 0.30 \
\$ 24 & + 20 \% & 0.25 \
\$ 28 & + 40 \% & 0.20
\end{array}$$ Assuming that Phoenix is not expected to pay any dividends during the coming year, determine the expected rate of return on Phoenix Stock.
A) 8%
B) 0%
C) 10%
D) 40%

Quizplus · Accepted Answer

The expected rate of return is the weighted average of the possible rates of return, with the weights being the probabilities of each rate of return. In this case, the expected rate of return is:(0.25 x -20%) + (0.30 x 0%) + (0.25 x 20%) + (0.20 x 40%) = 8%

Phoenix Company Common Stock Is Currently Selling for $20 Per