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.

Question

Quizplus · Accepted Answer

The expected return on an asset is calculated by multiplying each possible return by its probability and then summing these products. The probabilities of all possible outcomes must sum to 1 to represent a complete range of outcomes. Choices A, C, D, and E contain misconceptions about how expected returns are calculated or misunderstandings about investment outcomes.

When Computing the Expected Return on a Share of Common