CS Executive · Corporate Accounting and Financial Management · Security Analysis
A stock of Narmada Foods Ltd. has the following possible returns: 10% with probability 0.3, 14% with probability 0.5 and 20% with probability 0.2. What is its expected return?
The expected return is 14.0%. It is the probability-weighted average of the possible returns: 0.3×10 plus 0.5×14 plus 0.2×20 gives 3 plus 7 plus 4, which equals 14%. A simple average of the three returns would give a different, incorrect figure.
- A14.6%Correct
- B14.0%
- C15.3%
- D13.2%
Explanation
Expected return = 0.3×10 + 0.5×14 + 0.2×20 = 3 + 7 + 4 = 14%. Check: the weights sum to 1.0, so the result is 14%. The option 14.6% is therefore wrong; the correct value is 14.0%.
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