Which of the following is true given various states of the economy?
A) Stock returns are generally not affected by the state of the economy
B) The summation of the probabilities of the various economic states must equal to 10
C) The majority of stock returns increase as the state of the economy worsens
D) Both the risk and return on a security are affected by the likelihood of various economic states occurring
E) The probabilities of the various economic states affect the expected return on a stock, but not the level of risk associated with those returns

Question

Quizplus · Accepted Answer

The likelihood of various economic states occurring affects the risk and return on a security. Therefore, option D is true. Option A is incorrect as stock returns are affected by the state of the economy. Option B is incorrect as the summation of probabilities should equal 1, not 10. Option C is incorrect as most of the stock returns decrease as the state of the economy worsens. Lastly, option E is incorrect as the probabilities of the various economic states affect both the expected return and the level of risk associated with those returns.

Which of the Following Is True Given Various States of the Economy