Question

Suppose a stock will have a return of -10% during a recession, and a return of 20% with normal market condition. If over the next year, the chance of recession is 40%, and the chance of normal condition is 60%. The stock's expected return next year is ______ %.

Answer 1

Answer: 8%

Explanation:

Expected return is a weighted average of the different returns that a stock will have in different economic conditions.

This stock's expected return is;

= (Probability Economic state * Return given economic state) + (Probability Economic state b * Return given economic state b)

= ( 40% * -10%) + (20% * 60%)

= 8%