For the coming year you have determined that the following possibilities are most likely for stock...

For the coming year you have determined that the following possibilities are most likely for stock A:

Economic State	Probability	Return
Good	0.60	12
Bad	0.40	-2

What is the expected return for stock A?

Expert Solution

Expected return is probability weighted return.

E(R) = w1 * r1 + w2 * r2

E(R) = 0.60 * 12% + 0.40 * -2%

E(R) = 7.20% + (-0.80%)

E(R) = 6.40%

jeff jeffy answered 3 years ago

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