Taggart Inc.'s stock has a 50% chance of producing a 36% return, a 30% chance of producing a 10% return, and a 20% chance of producing a 28% return. What is the firm's expected rate of return? Do not round your intermediate calculations.

The expected rate of return for Taggart Inc.'s stock can be calculated by multiplying each possible return by its respective probability and then summing the results. Here's how you do it:

1. Multiply each possible return by its probability of occurrence: - For a 36% return (probability of 50% or 0.5): 0.5 * 36 = 18 - For a 10% return (probability of 30% or 0.3): 0.3 * 10 = 3 - For a 28% return (probability of 20% or 0.2): 0.2 * 28 = 5.6

2. Add the results of these multiplications to find the expected return: Expected return = 18 + 3 + 5.6 = 26.6%

Therefore, the expected rate of return for Taggart Inc.'s stock is 26.6%.

Extra: The concept of expected return is fundamental in finance, particularly in the fields of investing and portfolio management. It is a measure of the average outcome one might expect to see if an investment was made repeatedly over a long period. The calculation relies on a weighted average, which takes into account all the possible returns and the likelihood of each.

In practice, expected return gives investors a way to compare different investment opportunities. It is important to remember, however, that the expected return is not a guaranteed return but an average based on probabilities. Therefore, actual returns can vary, sometimes significantly, from the expected return.

Also, it's essential to note that the expected return doesn't consider the variability or risk of the different outcomes. This is where other measures, like variance and standard deviation, come into play to give investors a better understanding of the risks associated with a particular investment. Risk assessment is particularly important when building a diversified portfolio where the goal is not only to maximize returns but also to minimize risk.