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21 April, 13:32

Consider the following information:

Rate of Return If State Occurs

State of Probability of

Economy State of Economy Stock A Stock B

Recession. 16.07 -.11

Normal. 57.10.18

Boom. 27.15.35

Calculate the expected return for each stock. (Do not round intermediate calculations. Enter your answers as a percent rounded to 2 decimal places, e. g., 32.16.)

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Answers (1)
  1. 21 April, 13:37
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    10.87%; 17.95%

    Explanation:

    Expected return:

    = (probability of recession * return during recession) + (probability of normal * return during normal) + (probability of boom * return during boom)

    Expected return for stock A:

    = (0.16 * 0.07) + (0.57 * 0.10) + (0.27 * 0.15)

    = 0.1087

    = 10.87%

    Expected return for stock B:

    = (0.16 * - 0.11) + (0.57 * 0.18) + (0.27 * 0.35)

    = 0.1795

    = 17.95%
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