Expected Future Returns for Stocks A and B

19 Dec 2023

What is the expected rate of return for stock B?

The expected rate of return for stock B is approximately 11%.

To calculate the expected return for stock B, we need to consider the probability distribution of returns for both stocks A and B.

Let's calculate the expected return for stock B:

Probability Return Stock B (%)

0.1 -28%

0.2 0%

0.4 16%

0.2 20%

0.1 36%

To calculate the expected return, we multiply each return by its corresponding probability and sum the results:

Expected Return Stock B = (0.1 * -28%) + (0.2 * 0%) + (0.4 * 16%) + (0.2 * 20%) + (0.1 * 36%)

Expected Return Stock B = -2.8% + 0% + 6.4% + 4% + 3.6%

Expected Return Stock B = 11.2%

Therefore, the expected rate of return for stock B is approximately 11.2%.