Question

Consider the following information:

Answer 1

Answer:

10.87% ; 17.95%

Explanation:

Expected return:

= (probability of recession × return during recession) + (probability of normal × return during normal) + (probability of boom × return during boom )

Expected return for stock A:

= (0.16 × 0.07) + (0.57 × 0.10) + (0.27 × 0.15)

= 0.1087

= 10.87%

Expected return for stock B:

= (0.16 × -0.11) + (0.57 × 0.18) + (0.27 × 0.35)

= 0.1795

= 17.95%