You have been given this probability distribution for the holding-period return for KMP stock: $$\begin{array} { l c r }
\text { Stock of the Economy } & \text { Probability } & \text { HPR } \
\text { Boom } & 0.30 & 18 \% \
\text { Normal growth } & 0.50 & 12 \% \
\text { Recession } & 0.20 & - 5 \% \
\hline
\end{array}$$ What is the expected holding-period return for KMP stock?
A) 10.40%
B) 9.32%
C) 11.63%
D) 11.54%
E) 10.88%

Question

You have been given this probability distribution for the holding-period return for KMP stock: $$\begin{array} { l c r } 
\text { Stock of the Economy } & \text { Probability } & \text { HPR } \
\text { Boom } & 0.30 & 18 \% \
\text { Normal growth } & 0.50 & 12 \% \
\text { Recession } & 0.20 & - 5 \% \
\hline
\end{array}$$ What is the expected holding-period return for KMP stock?
A) 10.40%
B) 9.32%
C) 11.63%
D) 11.54%
E) 10.88%

Quizplus · Accepted Answer

The expected holding-period return is the weighted average of the possible returns, where the weights are the probabilities of each return. So, the expected return is:(0.30 * 18%) + (0.50 * 12%) + (0.20 * -5%) = 10.40%

You Have Been Given This Probability Distribution for the Holding-Period