Given the expected returns and probabilities of various states of the world in this table, what is the expected return for Carbide Company?
Carbide Company
State of the Economy Probability of State Return on State
Boom .30 18%
Steady .55 10%
Recession .15 -5%
A) 10.15%
B) 5.40%
C) 5.50%
D) -0.75%
Answer: A
Explanation: A) Expected payoff = Σ payoffi × probabilityi = .30 ∗ 18% + .55 ∗ 10% + .15 ∗ -5% = 10.15%
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