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yulyashka [42]
3 years ago
9

Crabby Shores stock is expected to return 15.7 percent in a booming economy, 9.8 percent in a normal economy, and 2.3 percent in

a recession. The probabilities of an economic boom, normal state, or recession are 15 percent, 73 percent, and 12 percent, respectively. What is the expected rate of return on this stock?
Business
1 answer:
VLD [36.1K]3 years ago
4 0

Answer:

The expected return on the stock is 9.785%

Explanation:

The expected rate of return on a stock is the return of the stock expected in different scenarios multiplied by the probability that those scenarios will occur. The expected return can be calculated as follows,

r = rA * pA + rB * pB + ... + rN * pN

  • Where,
  • rA, rB to rN expects return under different scenarios
  • pA, pB to pN represents the probabilities of each scenario

Thus,

r = 0.157 * 0.15  +  0.098 * 0.73  +  0.023 * 0.12  

r = 0.09785 or 9.785

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