You recently purchased a stock that is expected to earn 22 percent in a booming economy, 11 percent in a normal economy, and lose 8 percent in a recessionary economy. The probability of a boom economy is 16 percent while the probability of a normal economy is 68 percent. What is your expected rate of return on this stock

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10-05-2022
Mathematics

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You recently purchased a stock that is expected to earn 22 percent in a booming economy, 11 percent in a normal economy, and lose 8 percent in a recessionary economy. The probability of a boom economy is 16 percent while the probability of a normal economy is 68 percent. What is your expected rate of return on this stock

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ewomazinoade ewomazinoade · Answer 1 · 2022-05-12T11:37:56+02:00

The expected return of the stock given the three predicted states of the economy and the expected returns is 9.72%.

What is the expected rate of return on this stock?

The expected return of the stock is the return that can be expected to be earned given the three states of the economy.

Expected return = (probability of a boom x return in a boom) + (probability of a normal economy x return in a normal economy) + (probability of a recession x return in a recession)

probability of a recession = 100 - 16 - 68 = 16%

Expected return = (22% x 0.16) + (11% x 0.68) - (8% x 0.16) = 9.72%

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