Ronnie estimates that there are three possible return outcomes for a stock he is considering for purchase
He thinks that there is a 45% chance the economy will boom and his stock will return 25%, a 50% chance the economy will continue at its current pace and the stock will return 8%, and finally, that there is a 5% chance that the economy will falter and the expected return on his stock will be -10%. Given these probabilities and conditional expected returns, what is Ronnie's expected return on the stock he is considering for purchase?
A) 8.00%
B) 11.25%
C) 14.75%
D) 15.25%
Answer: C
Explanation: C) Expected payoff = Σ payoffi × probabilityi = .45 ∗ 25% + .50 ∗ .08% + .05% ∗ -10% = 14.75%.
You might also like to view...
Which of the following is included in the entry to record estimated warranty payable?
A) a credit to Estimated Warranty Payable B) a credit to Merchandise Inventory C) a credit to Warranty Expense D) a debit to Estimated Warranty Payable
Nordstrom department stores, which are well known for exceptional customer service, uses:
A) an elaborate system to provide employees answers on how to handle any customer situation. B) a single 5 x 8" card containing 75 words as its guide to employee behavior. C) a well-detailed employee handbook. D) a simple phrase, "treat the customer like a king" as its major guideline.