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Chapter 17: Q6. (page 369)

An investment has a 50 percent chance of generating a 10 percent return and a 50 percent chance of generating a 16 percent return. What is the investment’s average expected rate of return?

  1. 10 percent

  2. 11 percent

  3. 12 percent

  4. 13 percent

  5. 14 percent

  6. 15 percent

  7. 16 percent

Short Answer

Expert verified

The correct option is (d): 13 percent

Step by step solution

01

Step 1. Explanation

The average expected rate of return is calculated below:

E=0.5×10%+0.5×16%=5%+8%=13%

The average expected rate of return is 13%.

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Most popular questions from this chapter

Why is it so hard for actively managed funds to generate higher rates of return than passively managed index funds having similar levels of risk? Is there a simple way for an actively managed fund to increase its average expected rate of return?

If an investment has 35 percent more non-diversifiable risk than the market portfolio, its beta will be:

  1. 35

  2. 1.35

  3. 0.35

What are mutual funds? What different types of mutual funds are there? And why do you think they are so popular with investors?

Sammy buys stock in a suntan-lotion maker and also stock in an umbrella maker. One stock does well when the weather is good; the other does well when the weather is bad. Sammy’s portfolio indicates that “weather risk” is a _______ risk.

  1. diversifiable

  2. nondiversifiable

  3. automatic

What determines the vertical intercept of the Security Market Line (SML)? What determines its slope? And what will happen to an asset’s price if it initially plots onto a point above the SML?
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