You own a stock that you think will produce a return of 11 percent in a good economy and 3 percent in a poor economy. Given the probabilities of each state of the economy occurring, you anticipate that your stock will earn 6.5 percent next year. Which one of the following terms applies to this 6.5 percent?
A) Arithmetic return
B) Historical return
C) Expected return
D) Geometric return
E) Required return

Question

Quizplus · Accepted Answer

The 6.5 percent is the expected return, which is calculated as the weighted average return of each potential state of the economy. It is not the arithmetic return, historical return, geometric return, or required return, as these terms have different meanings and calculations.

You Own a Stock That You Think Will Produce a Return