Question

The expected return of a stock, based on the likelihood of various economic outcomes, equals the:

a. highest expected return given any economic state.
b. arithmetic average of the returns for each economic state.
c. summation of the individual expected rates of return.
d. weighted average of the returns for each economic state.
e. return for the economic state with the highest probability of occurrence.

Answer 1

The expected return is the weighted average of possible returns, factoring in the probability of each economic state. Therefore, the correct option is D.

Step-by-step explanation:

The expected return of a stock, based on the likelihood of various economic outcomes, equals the weighted average of the returns for each economic state. This involves multiplying each possible return by the probability of that return occurring, and then summing these products to get the overall expected return. This approach acknowledges that different economic states have different probabilities of occurring, and it provides a more accurate measure of expected return than simply calculating an arithmetic average or focusing on one particular economic state.