Which one of the following statements is correct concerning the expected rate of return on an individual stock given various states of the economy?
A) The expected return is a geometric average where the probabilities of the economic states are used as the exponential powers.
B) The expected return is an arithmetic average of the individual returns for each state of the economy.
C) The expected return is a weighted average where the probabilities of the economic states are used as the weights.
D) The expected return is equal to the summation of the values computed by dividing the expected return for each economic state by the probability of the state.
E) As long as the total probabilities of the economic states equal 100%, then the expected return on the stock is a geometric average of the expected returns for each economic
State.

Question

Quizplus · Accepted Answer

The expected return on an individual stock given various states of the economy is a weighted average where the probabilities of the economic states are used as the weights. This is because the expected return should take into account the likelihood of each economic state occurring, and the probability-weighted calculation creates a more accurate representation of the expected return.

Which One of the Following Statements Is Correct Concerning the Expected