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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

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  1. 23 February, 19:41
    0
    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
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