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

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%

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