Question

Freedman Flowers' stock has a 50% chance of producing a 25% return, a 30% chance of producing a 10% return, and a 20% chance of producing a −28% return. What is the firm's expected rate of return?a. 9.41%b. 9.65%c. 9.90%d. 10.15%e. 10.40%

Answer 1

Answer:

c.  the firm's expected rate of return is 9.90%

Explanation:

Consider the following formula to calculate the expected return

Expected return = Sum of (Probability * Expected return)

= 50%*0.25 + 30%*0.10 + 20%*-0.28

= 0.125+0.03-0.056

= 0.099 or 9.9%