Expected Future Returns for Stocks A and B
What is the expected rate of return for stock B?
The expected rate of return for stock B is approximately 11%.
To calculate the expected return for stock B, we need to consider the probability distribution of returns for both stocks A and B.
Let's calculate the expected return for stock B:
Probability Return Stock B (%)
0.1 -28%
0.2 0%
0.4 16%
0.2 20%
0.1 36%
To calculate the expected return, we multiply each return by its corresponding probability and sum the results:
Expected Return Stock B = (0.1 * -28%) + (0.2 * 0%) + (0.4 * 16%) + (0.2 * 20%) + (0.1 * 36%)
Expected Return Stock B = -2.8% + 0% + 6.4% + 4% + 3.6%
Expected Return Stock B = 11.2%
Therefore, the expected rate of return for stock B is approximately 11.2%.