17. Seattle Best Company common stock is currently selling for $40 per share. Se

Question

17. Seattle Best Company common stock is currently selling for $40 per share. Security analysts at Goldman Sachs have assigned the following probability distribution to the price of (and rate of return on) Seattle Best stock one year from now:

Price        Rate of Return        Probability
$35            -12.5%                     0.55
$45              12.5%                    0.30
$55          +37.5%                    0.13
$65          +62.5%                   0.02
Assuming that Seattle Best is not expected to pay any dividends during the coming year, determine the expected rate of return on Seattle Best Stock.

A. 30.00%
B.      -6.25%
C.       3.00%
D.      10.05%

Explanation / Answer

Expected rate of return = (-12.5 x 55%) + (12.5 x 30%) + (37.5 x 13%) + (62.5 x 2%) = 3%. Thus, Option C.

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