Answer (B) is correct . Expected value computation can be applied to rates of return as well as to dollar amounts. ? Weighted Expected Expected Probability Return Return 0.1 –20% –2% 0.2 5% 1% 0.4 15% 6% 0.2 20% 4% 0.1 30% 3% 12%
Answer (A) is incorrect because This percentage results from improperly summing the expected rates of return and dividing by the number of occurrences.
Answer (C) is incorrect because This percentage results from failing to treat the –20% return figure as a reduction.
Answer (D) is incorrect because This percentage results from overstating the returns at the higher expected returns.
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The expected rate of return on Stock X is
