Question

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

The correct option is (d): 13 percent

Step-by-step solution

Step 1. Explanation

The average expected rate of return is calculated below:

$$\begin{gathered} \left[E\right]=\left(0.5\times 10\%\right)+\left(0.5\times 16\%\right) \\ =5\%+8\% \\ =13\% \end{gathered}$$

The average expected rate of return is 13%.