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: $\begin{array}{lll}\text { Price } & \text { Rate of Returin } & \text { Probability } \
\hline
\$ 16 & -20 \% & 0.25 \
20 & 0 \% & 0.30 \
24 & +20 \% & 0.25 \
28 & +40\%&0.20
\end{array}$ 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

Quizplus · Accepted Answer

The expected rate of return is calculated by multiplying each rate of return by its probability and summing the results: (-20% * 0.25) + (0% * 0.30) + (20% * 0.25) + (40% * 0.20) = -5% + 0% + 5% + 8% = 8%.

Phoenix Company Common Stock Is Currently Selling for $20 Per