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

A) 9.9%.

B) 12.7%.

C) 16.5%.

D) 13.8%

The correct answer is b. 12.7%

Explanation:

Expected return: It is used to calculate the expected value of the formula

In this question, the formula should be used which is shown 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 the solution can arrive.

So, 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%