Question

Stock A has the following returns for various states of the​ economy: State of the Economy Probability Stock​ A's Return Recession ​9% -−​72% Below Average ​16% -−​15% Average ​51% ​16% Above Average ​14% ​35% Boom ​10% ​85% Stock​ A's expected return is

Answer 1

Answer:

The correct answer is b.12.7%

Explanation:

Expected return: It is used to calculate the expected value of the return.

In this question, the formula is used which is presented below:

Expected return = Return of portfolio × Probability of portfolio

So,

For Recession, the expected return would be equal to

= -72 × 9% = -6.48%

For below average, the expected return would be equal to

= -15 × 16% = -2.4%

For average, the expected return would be equal to

= 16 × 51% = 8.16%

For above average, the expected return would be equal to

= 35 × 14% = 4.9%

For boom, the expected return would be equal to

= 85 × 10% = 8.5%

Now, do the sum of all states of the economy, so that we find the solution.

And, the answer would be

= -6.48% + (-2.4%) +8.16% +4.9% + 8.5%

= 12.68% round off = 12.7%

Thus, the Stock A's expected return is 12.7%

And, the correct answer is b.12.7%