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 return is the expected return, which is calculated based on the probabilities of the stock performing well or poorly in the two different economic scenarios. The arithmetic return would be the simple average of the stock returns, the historical return would be based on past performance rather than future expectations, the geometric return would be used if the stock returns were compounded over multiple periods, and the required return would depend on the investor's personal preferences and risk tolerance.

You Own a Stock That You Think Will Produce a Return