Example: Expected Returns Suppose you have predicted the following returns for stocks C and T in three possible states of the economy. What are the expected returns? Probability C I TR = Cap gain 15 25 State Boom 0.3 Normal 0.5 Recession ??? + Dividend 10 20 Yield 2 1 Rc = .3(15) + .5(10) + .2(2) = 9.9% R = .3(25) + .5(20) + .2(1) = 17.7%