GenLabs has been a hot stock the last few years, but is risky. The expected returns for GenLabs are highly dependent on the state of the economy as follows:
$\begin{array} { l l l }
\underline{\text { State of Economy }} & \underline{\text { Probability }} & \underline{ \text { GenLabs Returns } }\
\text { Depression } & . \mathbf { 0 5 } & \mathbf { - 5 0 \% } \
\text { Recession } & .10 & \mathbf { - 1 5 \% } \
\text { Mild Slowdown } & .20 & \mathbf { 5 \% } \
\text { Normal } & .30 & \mathbf { 1 5 \% } \
\text { Broad Expansion } & .20 & \mathbf { 2 5 } \% \
\text { Strong Expansion } & .15 & \mathbf { 4 0 \% }
\end{array}$
-The expected return on GenLabs is:
A)3.3%
B)8.5%
C)12.5%
D)20.5%
E)None of the above.

Question

GenLabs has been a hot stock the last few years, but is risky. The expected returns for GenLabs are highly dependent on the state of the economy as follows:
$\begin{array} { l l l } 
 \underline{\text { State of Economy }} &  \underline{\text { Probability }} & \underline{ \text { GenLabs Returns } }\
 \text { Depression } & . \mathbf { 0 5 } & \mathbf { - 5 0 \% } \
\text { Recession } & .10 & \mathbf { - 1 5 \% } \
\text { Mild Slowdown } & .20 & \mathbf { 5 \% } \
\text { Normal } & .30 & \mathbf { 1 5 \% } \
\text { Broad Expansion } & .20 & \mathbf { 2 5 } \% \
\text { Strong Expansion } & .15 & \mathbf { 4 0 \% }
\end{array}$
-The expected return on GenLabs is:
A)3.3%
B)8.5%
C)12.5%
D)20.5%
E)None of the above.

Quizplus · Accepted Answer

To find the expected return, we need to multiply each probability by its corresponding return and add them up. 
Expected Return = (0.5)(-50%) + (0.1)(-15%) + (0.2)(5%) + (0.3)(15%) + (0.2)(25%) + (0.15)(40%) 
Expected Return = -25% - 1.5% + 1% + 4.5% + 5% + 6% 
Expected Return = 12% 
Therefore, the best choice is C) 12.5%.

GenLabs Has Been a Hot Stock the Last Few Years