You recently purchased a stock that is expected to earn 22 percent in a booming economy, 11 percent in a normal economy, and lose 4 percent in a recessionary economy. There is a 24 percent probability of a boom, a 67 percent chance of a normal economy, and a 9 percent chance of a recession. What is your expected rate of return on this stock?

a. 6.14 percent

b. 11.00 percent

c. 12.29 percent

d. 9.67 percent

e. 3.45 percent

Question

Alayna Rowland

Business

23 February, 19:38

You recently purchased a stock that is expected to earn 22 percent in a booming economy, 11 percent in a normal economy, and lose 4 percent in a recessionary economy. There is a 24 percent probability of a boom, a 67 percent chance of a normal economy, and a 9 percent chance of a recession. What is your expected rate of return on this stock?

a. 6.14 percent

b. 11.00 percent

c. 12.29 percent

d. 9.67 percent

e. 3.45 percent

+4

Answers (1)

Know the Answer?

Luis · Answer 1

Return on stock will be 12.65%

So option (c) will be the correct option

Explanation:

We have given expected return in booming economy = 22 %

Expected return in normal economy = 11 %

Expected return in recessionary economy = 4%

Probability of boom = 24% = 0.24

probability of normal economy = 67%=0.67

Probability of recession = 9 % = 0.09

So Expected return on stock = (Return in boom economy x Probability of boom economy) + (Return in normal economy x Probability of normal economy) + (Return in recessionary economy x Probability of recessionary economy)

Expected return on stock = (0.22 x 0.24) + (0.11 x 0.67) + (-0.04 x 0.09)

= 0.0528 + 0.0737 = 0.1265 = 12.6%

So option (c) will be the correct option