GenLabs has been a hot share the last few years,but is risky.The expected returns for GenLabs are highly dependent on the state of the economy as follows: $\begin{array}{|l|l|l|}
\hline \text { State of Economy } & \text { Probability } & \text { GenLabs Returns } \
\hline \text { Depression } & .05 & -50 \% \
\hline \text { Recession } & .10 & -15 \% \
\hline \text { MildSlowdown } & .20 & 5 \% \
\hline \text { Normal } & .30 & 15 \% \
\hline \text { Broad Expansion } & .20 & 25 \% \
\hline \text { StrongExpansion } & .15 & 40 \%\
\hline
\end{array}$ The expected return on GenLabs is:
A)3.3%
B)8.5%
C)12.5%
D)20.5%
E)None of the above.

Question

Quizplus · Accepted Answer

To find the expected return, we need to multiply the probability of each state of the economy by its corresponding return and then sum up the results. That is,
Expected return = (0.05 x (-50%)) + (0.10 x (-15%)) + (0.20 x 5%) + (0.30 x 15%) + (0.20 x 25%) + (0.15 x 40%)
Expected return = -2.5% - 1.5% + 1% + 4.5% + 5% + 6%
Expected return = 12.5%
Therefore, the best choice is C, 12.5%.

GenLabs Has Been a Hot Share the Last Few Years,but