Question

Considering the world economic outlook for the coming year and estimates of sales and earning for the pharmaceutical industry, you expect the rate of return for Lauren Labs common stock to range between -20 percent and +60 percent with the following probabilities.

Probability	Possible Returns
0.07	-0.20
0.15	-0.15
0.20	0.15
0.23	0.25
0.20	0.35
0.15	0.60

Compute the expected rate of return E(R_i) for Lauren Labs. Round your answer to four decimal places.

Answer 1

Expected Rate of return E(R_i) = 0.2110

Note:

Probability	Possible Returns	Probability * Possible returns
0.07	-0.2	-0.0140
0.15	-0.15	-0.0225
0.2	0.15	0.0300
0.23	0.25	0.0575
0.2	0.35	0.0700
0.15	0.6	0.0900
Expected rate of return E(Ri) = Sum of Probability* Possible returns		0.2110