Asked by apoorva kalra on Jun 28, 2024
Verified
Consider the following probability distribution for stocks C and D: State Probability Return on Stock C Return on Stock D 10.307%−9%20.5011%14%30.20−16%26%\begin{array}{cccc}\text { State } & \text { Probability } & \text { Return on Stock C} & \text { Return on Stock D } \\1 & 0.30 & 7\% & -9\% \\2 & 0.50 & 11\% & 14\% \\3 & 0.20 & -16\% & 26\%\end{array} State 123 Probability 0.300.500.20 Return on Stock C7%11%−16% Return on Stock D −9%14%26%
The expected rates of return of stocks C and D are _____ and _____, respectively.
A) 4.4%; 9.5%
B) 9.5%; 4.4%
C) 6.3%; 8.7%
D) 8.7%; 6.2%
E) None of the options are correct.
Probability Distribution
Probability distribution describes how the probabilities of various outcomes are distributed for a random variable, outlining the likelihood of different results.
- Understand and interpret probability distributions for stock returns.
- Determine the projected earnings of a portfolio through an analysis of its components and their proportional weights.
Verified Answer
ZK
Zybrea KnightJul 03, 2024
Final Answer :
A
Explanation :
The expected rate of return for a stock is calculated by multiplying each possible return by its probability and then summing these products. For Stock C: E(RC)=0.30(7%)+0.50(11%)+0.20(−16%)=2.1%+5.5%−3.2%=4.4%E(R_C) = 0.30(7\%) + 0.50(11\%) + 0.20(-16\%) = 2.1\% + 5.5\% - 3.2\% = 4.4\%E(RC)=0.30(7%)+0.50(11%)+0.20(−16%)=2.1%+5.5%−3.2%=4.4% . For Stock D: E(RD)=0.30(−9%)+0.50(14%)+0.20(26%)=−2.7%+7%+5.2%=9.5%E(R_D) = 0.30(-9\%) + 0.50(14\%) + 0.20(26\%) = -2.7\% + 7\% + 5.2\% = 9.5\%E(RD)=0.30(−9%)+0.50(14%)+0.20(26%)=−2.7%+7%+5.2%=9.5% .
Learning Objectives
- Understand and interpret probability distributions for stock returns.
- Determine the projected earnings of a portfolio through an analysis of its components and their proportional weights.