NISM Certifications · NISM-Series-XV: Research Analyst · Fundamentals of Risk and Return
A stock's expected returns in three equally likely scenarios (boom, normal, slump) are 30%, 12% and -6%. What is its expected return?
The expected return is 12%. With three equally likely scenarios, each has a one-third weight, so the probability-weighted average is (30 + 12 - 6) divided by 3, which equals 36 divided by 3, or 12 percent.
- A10%
- B12%Correct
- C14%
- D18%
Explanation
Each scenario has probability 1/3. Expected return = (30 + 12 - 6)/3 = 36/3 = 12%. Choosing 18% would ignore the slump; 10% and 14% do not reconcile with the data.
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