An investment's possible payoffs are - 10 percent, 10 percent, and 30 percent. The probabilities that these payoffs will occur are 0.30, 0.40, and 0.30, respectively. What is the expected rate of return on the investment?

The expected rate of return on the investment is 10%

Explanation:

Expected rate of return is calculated as a weighted average of all possible payoff. It is calculated by multiplying potential payoffs by the chances of occurring and then adding these results.

In this case

Payoffs = - 10 percent Probabilities 0.30 (30%)

Payoffs = 10 percent Probabilities 0.40 (40%)

Payoffs = 30 percent Probabilities 0.30 (30%)

Expected rate of return = - 10% x 30% + 10% x 40% + 30% x 30%

Expected rate of return = - 0.03+0.04 + 0.09=0.1

Expected rate of return = 10%