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11 December, 19:46

A stock is expected to return 11% in a normal economy, 19% if the economy booms, and lose 8% if the economy moves into a recessionary period. The economists predict a 65% chance of a normal economy, a 25% chance of a boom, and a 10% chance of a recession. What is the expected return on the stock? A. 11.10%B. 11.23%C. 12.06%D. 11.98%

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  1. 11 December, 21:02
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    Expected Return = 11.10 %

    so correct option is A. 11.10%

    Explanation:

    given data

    return in normal economy = 11%

    economy booms = 19%

    economy moves loss = 8%

    economists predict = 65%

    boom = 25 %

    chance of recession = 10%

    to find out

    What is the expected return on the stock

    solution

    we get here Expected Return for all that is

    State of Economy Probability Return Expected Return

    Normal 65% 11% 0.0715

    Booms 25% 19% 0.0475

    Recessionary 10% - 8% - 0.0080

    Expected Return 0.1110

    as here Expected Return = Probability * Expected Return ... 1

    Expected Return = 11.10 %

    so correct option is A. 11.10%
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