George is considering an investment in Parson 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
Parson Inc.
Recession .25 -20%
Steady .60 10%
Boom .15 35%
A) 5.00%
B) 6.25%
C) 8.33%
D) 10.00%
Answer: B
Explanation: B) Expected payoff = Σ payoffi × probabilityi = .25 ∗ -20% + .60 ∗ 10% + .15 ∗ 35% = 6.25%.
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