Dothan Inc.'s stock has a 25% chance of producing a 16% return, a 50% chance of...

Dothan Inc.'s stock has a 25% chance of producing a 16% return, a 50% chance of producing a 12% return, and a 25% chance of producing a -18% return. What is the firm's expected rate of return? Do not round your intermediate calculations.

a. 4.51%

b. 4.29%

c. 5.50%

d. 4.68%

e. 6.38%

Expert Solution

What is the firm's expected rate of return?

Answer: C) 5.50%

Workings

Formula for calculating the firms expected rate of return is as follows;

Expected return = Total of (probability * return)

= (25% * 16%) + (50% * 12%) + (25% * -18%)

= 4% + 6% - 4.50%

= 5.50%

Note: data provided in the question

Chance (Probability)	Rate of return
25%	16%
50%	12%
25%	-18%

jeff jeffy answered 2 years ago

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