When Computing the Expected Return on a Share of Common

question 379

Multiple Choice

When computing the expected return on a share of common stock (or other asset) where you have projected returns for each state of the economy along with associated probabilities of occurrence:

• A) The expected return is equal to the sum of the returns projected for each state of the economy.
• B) The probabilities for the states must sum to 1.
• C) It is safe to ignore any states in which the return is negative.
• D) If all of the state-returns and probabilities are positive, the total expected return must be higher than the highest state return.
• E) The lowest projected state-return is guaranteed to be your largest loss if you buy the investment.

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Definitions:

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