Answer:
The expected return on this stock is:
C. -6.80%.
Explanation:
a) Data and Calculations:
State of the Economy Probability E(R) Weighted Value
Boom 0.40 16% 0.064
Recession 0.60 -22% -0.132
Total expected returns -0.068
= -6.8%
Let us assume that this stock is Stock A. Therefore, Stock A's expected return is given by adding the weighted returns of the two economic states of Boom and Recession. The result shows that the returns will be negative (-6.8%). This implies that instead of appreciating in value, the stock will actually depreciate by 6.8%.
