Question

1. Taggart Inc.'s stock has a 50% chance of producing a 25% return, a 30% chance of producing a 10% return, and a 20% chance of producing a −28% return. What is the firm's expected rate of return? a. 9.41% b. 9.65% c. 9.90% d. 10.15% e. 10.40%

Answer 1

Answer:

c. 9.90%

Explanation:

The formula to compute the expected rate of return is shown below:

Expected rate of return = (Probability 1 × Possible Returns 1) + (Probability 2 × Possible Returns 2) + (Probability 3 × Possible Returns 3)

= (0.50 × 25%) + (0.30 × 10%) + (0.20 × - 28%)

= 12.5% + 3% - 5.6%

= 9.90%

Simply we multiplied the probabilities with its return so that the expected rate of return can come.