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You recently purchased a stock that is expected to earn 19 percent in a booming economy, 14 percent in a normal economy, and lose 3 percent in a recessionary economy. There is 21 percent probability of a boom, 70 percent chance of a normal economy, and 9 percent chance of a recession. What is your expected rate of return on this stock?

Respuesta :

Shahzaibfaraz

Answer:

r = 0.1352 or 13.52%

Explanation:

The expected rate of return or r is the average return that is expected from the stock. It is the expected rate of profit or loss that an investor can anticipate on an investment whose returns are known or anticipated.

The expected rate of return of can be calculated as follows,

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

Where,

  • pA, pB and so on represents the probability of an event or state to occur
  • rA, rB and so on are the return in different events  or states

r = 0.21 * 0.19  +  0.7 * 0.14  +  0.09 * -0.03

r = 0.1352 or 13.52%

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