Question

Based on the historical returns shown below, what is the stock’s expected return for 2017?

Year	Return
2014	17%
2015	-12%
2016	25%

Question 1 options:

	A) 9.4%
	B) 9.6%
	C) 9.8%
	D) 10.0%
	E) 10.2%

Answer 1

What is the stocks expected return for 2017?

Answer: D) 10%

Workings

Since probability is not provided we can find the return in by 2 methods:

1. Using Arithmetic mean Method.

2. Using probability method (assuming all years are having equal probability).

Arithmetic Mean Method

Formula for calculating return using Arithmetic mean method is as follows

Arithmetic Mean (x̅) = Sum of all observations ÷ Number of Observations

Sum of all observations          = 17% + (-12%) + 25%

                                                =30%

Number of Observations        = 3

Arithmetic Mean (x̅) return / Expected return of stock         = 30 ÷ 3

                                                                                                =10%

Probability method

Since probability is these return are not provided we will assume that they are equal, Formula for calculating return is as follows.

Expected return of stock            = Total of (probability * return)

                                               

Expected return of stock                    = (1/3 * 17%) + (1/3 * -12%) + (1/3 * 25%)

                                                            = 10%

Note:

Probability for each outcome = 1/3 (assumed equal)