You are considering investing in a project with the following possible outcomes: Probability of Investment
States Occurrence Returns
State 1: Economic boom 15% 16%
State 2: Economic growth 45% 12%
State 3: Economic decline 25% 5%
State 4: Depression 15% -5%
Calculate the expected rate of return for this investment.
A) 9.8%
B) 7.0%
C) 8.3%
D) 6.3%

Question

Quizplus · Accepted Answer

The expected rate of return is calculated by multiplying each possible return by its probability of occurrence and adding up the product of all possible outcomes. In this case, the expected rate of return would be:

(0.15*0.16) + (0.45*0.12) + (0.25*0.05) + (0.15*(-0.05)) = 0.024 + 0.054 + 0.0125 - 0.0075 = 0.083 or 8.3%

Therefore, the best choice is C) with an expected return of 8.3%.

You Are Considering Investing in a Project with the Following