Question

A stock is expected to return 11% in a normal economy, 19% if the economy booms, and lose 8% if the economy moves into a recessionary period. Economists predict a 65% chance of a normal economy, a 25% chance of a boom, and a 10% chance of a recession. What is the expected return on the stock

Answer 1

Answer:

Expected return  = 50.4%

Explanation:

The expected rate of return is the weighted average of all the possible returns associated with an investment decision. The returns are weighted using the probability associated with their outcomes.

Expected return = WaRa + Wb+Rb + Wn+Rn

W- weight of the outcome, R - return of the outcome

E(R) = 11% ×0.65) + ( 19%× 0.25) + (-8%×0.1)

      = 50.4%