Ifthe requred return from an asset is 108% and the asset has a 56% probability o

Question

Ifthe requred return from an asset is 108% and the asset has a 56% probability of yo ling a 188% return and a 44% probability of earning a 42% retum whch investment activity should you make? (Select the best choice below) o A. You should not purchase the assets sance the expected return exceeds the requred return O B. You should purchase the assets since the required return exceeds the expected return O C. You should not purchase the assets since the required return exceeds the expected return D. You should purchase the assets since the expected return exceeds the required return

Explanation / Answer

Expected rate of return of assets = (56% × 18.80%) + (44% + 4.20%)

= 10.53% + 1.85%

= 12.38%

Expected return of assets is 12.38% and required rate of return is 10.80%. So,you should purchase the assets since, the expected return exceeds the required return.

Option (D) is correct answer.

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