There are several different methods of calculating an average. Using historical rates of return, we can calculate either an Arithmetic Mean (AM) or a Geometric Mean (GM). Using projected future rates of return, we calculate an Expected Value instead of either the AM or GM. Assume we have made the following set of projections regarding the possible rates of return for a company we are analyzing:

State of the Economy Probability Return

Recession 25% 5%

Normal 55% 9%

Boom 20% 15%

What is the expected rate of return for this firm`s stock?

Multiple Choice

• 7.52%

• 9.20%

• 10.97%

• 6.56%