Answer (A) is correct . The expected rates of return for the two stocks can be arrived at using a weighted-average calculation, as follows: ? Marcel Company Stock Gilberte Company Stock Rate of Weighted Rate of Weighted Return Probability Averages Return Probability Averages ?6.0 % ¡Á 10% = 0.60 % ?7.0 % ¡Á 25% = 1.75 % ?4.0 % ¡Á 40% = 1.60 % ?5.0 % ¡Á 25% = 1.25 % ?2.0 % ¡Á 40% = 0.80 % ?0.0 % ¡Á 25% = 0.00 % (2.0)% ¡Á 10% = (0.20)% (1.0)% ¡Á 25% = (0.25)% Expected rate of return 2.80 % Expected rate of return 2.
Answer (B) is incorrect because Marcel Company stock’s expected rate of return is higher than that of Gilberte Company.
Answer (C) is incorrect because Marcel Company’s weighted downside risk is lower than Gilberte’s [(2.0% × 10%) < (1.0% × 25%)]. However, an expected rate of return calculation must be performed using the weighted average of all potential returns, not just the highest upside or lowest downside.
Answer (D) is incorrect because Gilberte Company’s weighted upside risk is higher than Marcel’s [(7.0% × 25%) > (6.0% × 10%)]. However, an expected rate of return calculation must be performed using the weighted average of all potential returns, not just the highest upside or lowest downside.
|
