An analyst is considering an investment in Treetops Inc.and has gathered the following information.What is the expected return for a share of the firm's stock? $$\begin{array} { | l | c | c | }
\hline \text { State of the } & \begin{array} { c }
\text { Probability of the } \
\text { State }
\end{array} & \begin{array} { c }
\text { Conditional Expected Return } \
\text { Ereetops Inc. }
\end{array} \
\hline \text { Recession } & .20 & - 20 \% \
\hline \text { Steady } & .40 & 10 \% \
\hline \text { Boom } & .40 & 35 \%\\hline
\end{array}$$
A)5.00%
B)6.25%
C)8.33%
D)14.00%

Question

An analyst is considering an investment in Treetops Inc.and has gathered the following information.What is the expected return for a share of the firm's stock? $$\begin{array} { | l | c | c | } 
\hline \text { State of the } & \begin{array} { c } 
\text { Probability of the } \
\text { State }
\end{array} & \begin{array} { c } 
\text { Conditional Expected Return } \
\text { Ereetops Inc. }
\end{array} \
\hline \text { Recession } & .20 & - 20 \% \
\hline \text { Steady } & .40 & 10 \% \
\hline \text { Boom } & .40 & 35 \%\\hline
\end{array}$$
A)5.00%
B)6.25%
C)8.33%
D)14.00%

Quizplus · Accepted Answer

The expected return is calculated by multiplying each state's probability by its conditional expected return and summing the results: (0.20 * -20%) + (0.40 * 10%) + (0.40 * 35%) = -4% + 4% + 14% = 14%.

An Analyst Is Considering an Investment in Treetops Inc A)500% B)6

An Analyst Is Considering an Investment in Treetops Inc A)500%
B)6