QUESTION Dothan Ines stock has a 25% chance of probing a head chance of producing a...

Question

Question

Answer 1

Answer #1

Solution :

The formula for calculation of Expected Return is

ER = ( R₁ * W₁ ) + ( R₂ * W₂ ) + ( R₃ * W₃ )

Where

ER = Expected Return ; R₁ = Return when chance is W₁ ; W₁ = Chance 1 ;

R₂ = Return when chance is W₂ ; W₂ = Chance 2 ; R₃ =Return when chance is W₃ ; W₃ = Chance 3 ;

As per the information given in the question we have

R₁ = 36 % ; W₁ = 25 % = 0.25 ; R₂ = 12 % ; W₂ = 50 % = 0.50 ;

R₃ = - 18 % ; W₃ = 25 % = 0.25 ;

Applying the available information in the formula we have

= ( 36 % * 0.25 ) + ( 12 % * 0.50 ) + ( - 18 % * 0.25 )

= 9 % + 6 % + ( - 4.50 % )

= 10.50 %

Thus the Expected Return of Dothan Inc.’s stock = 10.50 %

The solution is Option 2 = 10.50 %

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Answer 2

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