Compute the expected return given these three economic states, their likelihoods, and the potential returns: $$\begin{array} { | l | l | l | }
\hline \begin{array} { l }
\text { Economic } \
\text { State }
\end{array} & \text { Probability } & \text { Return } \
\hline \text { Fast Growth } & 0.2 & 23 \% \
\hline \text { Slow Growth } & 0.6 & 14 \% \
\hline \text { Recession } & 0.2 & - 30 \% \
\hline
\end{array}$$
A)3.5 percent
B)7.0 percent
C)7.5 percent
D)12.5 percent

Question

Compute the expected return given these three economic states, their likelihoods, and the potential returns: $$\begin{array} { | l | l | l | } 
\hline \begin{array} { l } 
\text { Economic } \
\text { State }
\end{array} & \text { Probability } & \text { Return } \
\hline \text { Fast Growth } & 0.2 & 23 \% \
\hline \text { Slow Growth } & 0.6 & 14 \% \
\hline \text { Recession } & 0.2 & - 30 \% \
\hline
\end{array}$$
A)3.5 percent
B)7.0 percent
C)7.5 percent
D)12.5 percent

Quizplus · Accepted Answer

To calculate expected return, we need to multiply the probability of each economic state by its potential return, and add up everything:

Expected Return = (0.2 x 23%) + (0.6 x 14%) + (0.2 x -30%) 
Expected Return = 4.6% + 8.4% - 6% 
Expected Return = 7.0%

Therefore, the answer is B, 7.0 percent.

Compute the Expected Return Given These Three Economic States, Their