Andre is considering an investment in Bristol Inc. and has gathered the following information. What is the expected return for a share of the firm's stock?
State of the Economy Probability of the
State Conditional Expected Return
Bristol Inc.
Recession .20 -10%
Steady .50 10%
Boom .30 45%
A) 45.00%
B) 65.00%
C) 16.50%
D) 15.00%
Answer: C
Explanation: C) Expected payoff = Σ payoffi × probabilityi = .20 ∗ -10% + .50 ∗ 10% + .30 ∗ 45% = 16.50%.
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