Stock A has the following returns for various states of the economy:

Stock A's expected return is
A) 5.4%.
B) 7.2%.
C) 8.2%.
D) 9.6%

Question

Stock A has the following returns for various states of the economy:

Stock A's expected return is
A) 5.4%. 
B) 7.2%. 
C) 8.2%. 
D) 9.6%

Quizplus · Accepted Answer

The expected return for Stock A can be calculated by taking the weighted average of the returns for each state of the economy, using the probabilities of each state as weights. 
Expected Return = (0.1 × 4%) + (0.2 × 8%) + (0.4 × 10%) + (0.2 × 12%) + (0.1 × 14%) 
= 0.4% + 1.6% + 4% + 2.4% + 1.4% 
= 8.2% 
Therefore, the best choice is C) 8.2%.

Stock a Has the Following Returns for Various States of the Economy