You have estimated the following probability distributions of expected future re
ID: 2617030 • Letter: Y
Question
You have estimated the following probability distributions of expected future returns for stocks A and B
Stock A Stock B
Probability Return Probability Return
0.1 -10% 0.2 2%
0.2 10% 0.2 7%
0.4 15% 0.3 12%
0.2 20% 0.2 15%
0.1 40% 0.1 165
a. What is the expected return of stock A? (25 points)
b. What is the expected return of stock B? (25 points)
Explanation / Answer
Solution:-
Formula for expected return of the stock = Summation of (Returns*Probability)
a) For Stock A:-
Expected return of "A"= 0.10*(-10)+0.20*10+0.4*15+0.2*20+0.1*40 = 15%
b)For stock "B":-
Expected return of "B"= 0.2*2+0.2*7+0.3*12+0.2*15+0.1*165
= 24.90%
Note:- The last return for the stock B is not clear so i have assumed 165% . If there is any typing mistake Please replace the value of 165% with the correct one then that will be the answer.
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