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

The expected return for the market is the weighted average of the returns of each state of the world, weighted by their probabilities.

E(RM) = 0.2(15%) + 0.6(10%) + 0.2(5%) = 10%

The expected return for Security J is calculated in the same way:

E(RJ) = 0.2(20%) + 0.6(10%) + 0.2(-5%) = 13%

Therefore, the answer is D: 10.0%;13.0%.

Given the Following Probability Distributions,what Are the Expected Returns for the Market