Skip to content

NISM Certifications · NISM-Series-XV: Research Analyst · Fundamentals of Risk and Return

A stock has the following possible one-year returns: 20% with probability 0.3, 10% with probability 0.5 and -10% with probability 0.2. What is its expected return?

The expected return is 9%. It is the probability-weighted sum: 0.3 times 20 gives 6, 0.5 times 10 gives 5, and 0.2 times minus 10 gives minus 2, totalling 9 percent. A simple average of outcomes would ignore the probabilities and be wrong.

  1. A6.0%
  2. B9.0%Correct
  3. C10.0%
  4. D13.3%

Explanation

Expected return = 0.3*20 + 0.5*10 + 0.2*(-10) = 6 + 5 - 2 = 9%. The 13.3% option is the simple average of the three returns, ignoring probabilities.

Did you get it right without looking?

One question tells you little. A timed set on Fundamentals of Risk and Return shows your real accuracy, how long you take and where you lose marks.

Practise Fundamentals of Risk and ReturnFree diagnostic mock

More Fundamentals of Risk and Return questions