XYZ Company common stock is currently selling for $20 per share. Security analys
ID: 2816395 • Letter: X
Question
XYZ Company common stock is currently selling for $20 per share. Security analysts at Smith Blarney have assigned the following probability distribution to the price of (and rate of return on) XYZ stock one year from now:
Price
Rate of Return
Probability
$14
–30%
0.30
22
10%
0.10
24
+20%
0..10
28
+40%
0.50
Assuming that XYZ is not expected to pay any dividends during the coming year, determine the expected rate of return on XYZ Stock.
Price
Rate of Return
Probability
$14
–30%
0.30
22
10%
0.10
24
+20%
0..10
28
+40%
0.50
Explanation / Answer
Expected rate of return = 0.3* (-30%) + 0.1 *10% + 0.1* 20% + 0.5*40%
= 14%
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