Multiple Choice
Most of the time, a floating-rate bond's coupon adjusts:
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7. Receivables and Investments
Introduction to Investments in Securities
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Given the following probability distribution for the possible returns of an asset, what is the expected return?\[\begin{array}{|c|c|}\hline\text{Return (25)} & \text{Probability} \\\hline10 & 0.2 \\8 & 0.5 \\4 & 0.3 \\\hline\end{array}\]A) 7.2\% B) 8.0\% C) 6.5\% D) 9.0\%
A
C) 6.5\%
B
D) 9.0\%
C
A) 7.2\%
D
B) 8.0\%
Verified step by step guidance1
Step 1: Understand the concept of expected return. The expected return is calculated as the weighted average of all possible returns, where the weights are the probabilities of each return occurring.
Step 2: Write down the formula for expected return: \( E(R) = \sum (R_i \times P_i) \), where \( R_i \) is the return for each outcome and \( P_i \) is the probability of that outcome.
Step 3: Identify the values from the table: \( R_1 = 10, P_1 = 0.2 \), \( R_2 = 8, P_2 = 0.5 \), \( R_3 = 4, P_3 = 0.3 \).
Step 4: Multiply each return by its corresponding probability: \( (10 \times 0.2), (8 \times 0.5), (4 \times 0.3) \).
Step 5: Add the results from Step 4 to find the expected return: \( E(R) = (10 \times 0.2) + (8 \times 0.5) + (4 \times 0.3) \).
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