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

The formula to calculate expected return is the weighted average of the returns for each state of the economy, where the weights are the probabilities of each state occurring.

Expected Return = (0.30 x 0.05) + (0.20 x 0.08) + (0.25 x 0.10) + (0.25 x 0.14) = 0.015 + 0.016 + 0.025 + 0.035 = 0.091 or 9.1%

Therefore, the best choice is C) 8.2% which is the closest answer choice to the calculated expected return of 9.1%.

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