Fundamentals of Financial Management (Concise 6th Edition)

Chapter 8 Risk and Rates of Return 235

Probability Distributions of Martin Products’ and U.S. Water’s Rates of Return

F I G U R E 8! 2

Probability of

Occurrence

a. Martin Products

Rate of Return

(%)

–60 0 10 80

0.4

0.3

0.2

0.1

Expected Rate

of Return

Probability of

Occurrence

b. U.S. Water

Rate of Return

(%)

0 5 10 15

0.4

0.3

0.2

0.1

Expected Rate

of Return

Continuous Probability Distributions of Martin Products’ and U.S. Water’s

F I G U R E 8! 3 Rates of Return

Note: The assumptions regarding the probabilities of various outcomes have been changed from those in Figure 8-2. There the probability of
obtaining exactly 10% was 40%; here it is much smaller because there are many possible outcomes instead of just three. With continuous
distributions, it is more appropriate to ask what the probability is of obtaining at least some speci# ed rate of return than to ask what the
probability is of obtaining exactly that rate. This topic is covered in detail in statistics courses.

Probability Density

U.S. Water

Martin Products

–60 0 10 80

Expected

Rate of Return

Rate of Return

(%)