Janette is considering an investment in Skytime Inc.and has gathered the following information.What is the expected return for a share of the firm's stock? $$\begin{array} { | l | c | c | }
\hline\text { State of the economy } & \begin{array}{c}
\text { Probability of the } \
\text { State }
\end{array} & \begin{array}{c}
\text { Conditional Expected Return } \
\text { Skytime Inc. }
\end{array}\
\hline \text { Recession } & 40 & - 10 \% \
\hline \text { Steady } & .20 & 10 \% \
\hline \text { Boom } & .40 & 45 \%\\hline
\end{array}$$
A)45.00%
B)65.00%
C)16.00%
D)15.00%

Question

Janette is considering an investment in Skytime Inc.and has gathered the following information.What is the expected return for a share of the firm's stock? $$\begin{array} { | l | c | c | } 
\hline\text { State of the economy } & \begin{array}{c}
\text { Probability of the  } \
\text { State }
\end{array} & \begin{array}{c}
\text { Conditional Expected Return } \
\text { Skytime Inc. }
\end{array}\
\hline \text { Recession } & 40 & - 10 \% \
\hline \text { Steady } & .20 & 10 \% \
\hline \text { Boom } & .40 & 45 \%\\hline
\end{array}$$
A)45.00%
B)65.00%
C)16.00%
D)15.00%

Quizplus · Accepted Answer

The expected return is calculated by multiplying each possible return by its probability and then summing these products. For Skytime Inc., this calculation is as follows: $$ (0.40 \times -10\%) + (0.20 \times 10\%) + (0.40 \times 45\%) = -4\% + 2\% + 18\% = 16\% $$

Janette Is Considering an Investment in Skytime Inc A)4500% B)65

Janette Is Considering an Investment in Skytime Inc A)4500%
B)65