Question

You recently purchased a stock that is expected to earn 19 percent in a booming economy,...

You recently purchased a stock that is expected to earn 19 percent in a booming economy, 12 percent in a normal economy, and lose 8 percent in a recessionary economy. The probability of a boom economy is 16 percent while the probability of a normal economy is 78 percent. What is your expected rate of return on this stock?

Group of answer choices

12.54 percent

12.40 percent

10.25 percent

11.92 percent

13.50 percent

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Homework Answers

Answer #1

The Correct answer is 11.92%

Expected Return = Weighted average of returns

Probability of Recession = 100% - 16% - 78%

= 6%

Note - The question states that stock earns 19% and 12% and lose 8% (in recession). This means we will get negative returns during the recession period and thus it is indicated by minus sign.

Calculation of Expected Return

Let the probability be P and stock returns be X

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