Asked by Ishaan Backliwal on Apr 29, 2024
Verified
Which one of the following statements is correct concerning the expected rate of return on an individual stock given various states of the economy?
A) The expected return is a geometric average where the probabilities of the economic states are used as the exponential powers.
B) The expected return is an arithmetic average of the individual returns for each state of the economy.
C) The expected return is a weighted average where the probabilities of the economic states are used as the weights.
D) The expected return is equal to the summation of the values computed by dividing the expected return for each economic state by the probability of the state.
E) As long as the total probabilities of the economic states equal 100%, then the expected return on the stock is a geometric average of the expected returns for each economic state.
Expected Rate of Return
The weighted average of all possible returns for an investment, accounting for the probability of each outcome.
Economic States
Various conditions describing the performance of an economy, such as growth, recession, or stability.
Arithmetic Average
The sum of values divided by the number of values, used for calculating the mean.
- Calculate and interpret the expected return on assets and portfolios under various economic states.
Verified Answer
YR
Yamuna RijalApr 30, 2024
Final Answer :
C
Explanation :
The expected return on an individual stock, given various states of the economy, is calculated as a weighted average where the probabilities of the economic states are used as the weights. This approach accounts for the likelihood of each state occurring and its corresponding return, providing a more accurate measure of expected return.
Learning Objectives
- Calculate and interpret the expected return on assets and portfolios under various economic states.