Answer (A) is correct . The expected rate of return on an investment is the sum of the weighted averages of the possible outcomes weighted by their probabilities. For ? Techspace, the computation is performed as follows: Possible Rate of Weighted State of the Economy Return Probability Averages Recession (10)% ¡Á 35% = (3.5)% Stable 10% ¡Á 40% = 4.0% Expansion 30% ¡Á 25% = 7.5% Expected rate of return 8.0%<
Answer (B) is incorrect because This percentage is a simple average of the returns.
Answer (C) is incorrect because This percentage results from adding, rather than subtracting, the average for the recession state.
Answer (D) is incorrect because This percentage results from failing to weight the rates of return by their probabilities.
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What is the expected rate of return on Techspace, Inc., stock?
