Question

Intro

Nautilus Clothing's stock has a 50% chance of producing a 15% return, a 20%
chance of producing a 21% return, and a 30% chance of producing a -13% return.
Part 1
What is the stock's expected return?

Answer 1

To calculate the stock's expected return, we need to multiply the probability of each return by its corresponding percentage return, and then sum up the results.

Let's calculate it step by step:

Return 1: 15% * 50% = 0.15 * 0.5 = 0.075 (or 7.5%)
Return 2: 21% * 20% = 0.21 * 0.2 = 0.042 (or 4.2%)
Return 3: -13% * 30% = -0.13 * 0.3 = -0.039 (or -3.9%)

Now, let's sum up the results:

Expected return = 0.075 + 0.042 - 0.039 = 0.078 (or 7.8%)

Therefore, the stock's expected return is 7.8%.