Question

If an investment is 80 percent likely to gain 40 percent but also 20 percent likely to lose 10 percent, then its average expected rate of return is:

Answer 1

if an investment is 80% likely to gain 40% but also 20% likely to lose 10%, then it's average expected rate of return is 30%.

Answer 2

Answer:

0.30

Explanation:

To get the expected return you need to multiply each probability scenario percentage by the investment return percentage under that scenario, then add the resulting amounts together to find the investment expected return:

Scenario          Probability          Return          Result

1                        80%                     40%             0.32

2                       20%                     -10%             -0.02

Expected return = 0.32-0.02 = 0.30

Note: The expected return is a way of determining the average net outcome of a possible investment, it is a good tool to get information about the investment but the final decision shouldn't be base on this item only, especially when you have a probability of a negative return.