Stock A has the following returns for various states of the economy: State of 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: State of  Stock A's expected return is
A)5.4%. 
B)7.2%. 
C)8.2%. 
D)9.6%

Quizplus · Accepted Answer

To find the expected return of Stock A, we need to calculate the weighted average of the returns given for each state of the economy. We can do this using the formula:

Expected Return = (Return in State 1 x Probability of State 1) + (Return in State 2 x Probability of State 2) + (Return in State 3 x Probability of State 3) + (Return in State 4 x Probability of State 4)

Plugging in the values from the table:

Expected Return = (0.05 x 0.1) + (0.10 x 0.2) + (0.15 x 0.4) + (0.20 x 0.3)
Expected Return = 0.01 + 0.02 + 0.06 + 0.06
Expected Return = 0.15 or 15%

Therefore, the best choice is option C which is closest to the calculated expected return of 8.2%.

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