This answer results from failing to weight the possible returns by their probabilities and simply averaging the five possible returns. This answer results from using absolute values for the returns in calculating the weighted average of the possible returns. However, the plus and minus signs for the returns should be used in calculating the expected return. This answer results from disregarding the minus and plus signs for the possible returns as well as failing to weight the returns by their probabilities and simply averaging the five possible returns. The expected return is a weighted average of all the possible returns, with the probability of each possible return serving as the weighting. Thus, the expected return is (?.10 * .05) + (.03 * .20) + (.08 * .50) + (.12 * .20) + (.15 * .05) = .0725 or 7.25%.
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