The expected return of a stock, based on the likelihood of various economic outcomes, equals the:

• A. sum of all possible returns without considering their probabilities
• B. maximum possible return among all economic outcomes
• C. weighted average of possible returns, where each return is multiplied by its probability
• D. minimum possible return among all economic outcomes

Answer: (C)

Verified step by step guidance

1. Understand that the expected return of a stock is a probabilistic concept, meaning it takes into account different possible economic outcomes and their likelihoods.
2. Identify that each possible return has an associated probability, which represents how likely that return is to occur.
3. Recall the formula for expected value (or expected return) in probability theory: \(\text{Expected Return} = \sum (\text{Probability of outcome} \times \text{Return of outcome})\).
4. Apply this formula by multiplying each possible return by its corresponding probability and then summing all these products together.
5. Recognize that this weighted average approach provides a more accurate measure of expected return than simply taking the maximum, minimum, or unweighted sum of returns.