Question

You recently purchased a stock that is expected to earn 11 percent in a booming economy, 9 percent in a normal economy and lose 6 percent in a recessionary economy. There is a 15 percent probability of a boom, a 74 percent chance of a normal economy. What is your expected rate of return on this stock

Answer 1

Answer:

Expected rate of return = 7.7%

Explanation:

The expected return on the stock would be the sum of the the probability of outcome times the outcome return.It is given using the relationship below

E= ∈ Ri.Pi

Expected return = (11%  × 0.15) + (9%  ×0.74)+ (-6%)  ×  0.11)= 7.7%

Note that the probability of recession = 1 - (0.74+0.15)= 0.11. This is so because the sum of the probability should equal 1

                                                         

Expected rate of return = 7.7%