Compute the Expected Return Given These Three Economic States,their Likelihoods,and

question 46

Multiple Choice

Compute the expected return given these three economic states,their likelihoods,and the potential returns:

• A)3.5 percent
• B)7.0 percent
• C)7.5 percent
• D)12.5 percent

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Definitions:

Asset-specific Risk

The risk associated with an investment in a specific asset, which can result from factors unique to that asset, independent of the market.

Portfolio Diversification

Portfolio diversification is an investment strategy that aims to reduce risk by allocating investments among various financial instruments, industries, and other categories.

Security Market Line

A line that represents the relationship between the expected return of a security and its systematic risk, illustrating the risk-return trade-off in the capital asset pricing model (CAPM).