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.)

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%