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(4) Given the following table of a probability distribution of two stocks rate of return, which stock you are going to pick,
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Answer #1

Expected Rate of Stock A = 0.10(-0.10) + 0.20(0.02) + 0.40(0.12) + 0.20(0.20) + 0.10(0.38)

Expected Rate of Stock A = 12.00%

Expected Rate of Stock B = 0.10(-0.35) + 0.20(0) + 0.40(0.20) + 0.20(0.25) + 0.10(0.45)

Expected Rate of Stock B = 14.00%

As Stock B has higher expected rate of return one would select stock B.

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