College

We appreciate your visit to You recently purchased a stock that is expected to earn 10 percent in a booming economy 4 percent in a normal economy and lose 4. This page offers clear insights and highlights the essential aspects of the topic. Our goal is to provide a helpful and engaging learning experience. Explore the content and find the answers you need!

You recently purchased a stock that is expected to earn 10 percent in a booming economy, 4 percent in a normal economy, and lose 4 percent in a recessionary economy. There is a 15 percent probability of a boom, a 70 percent chance of a normal economy, and a 15 percent chance of a recession.

What is your expected rate of return on this stock?

A. 1.85 percent
B. 3.70 percent
C. 10.00 percent
D. 4.67 percent
E. 3.33 percent

Answer :

Answer:

b. 3.70 percent

Explanation:

Expected rate of return of a stock, given probabilities, is calculated by summing up the product of probability of each state occurring by the expected return of the stock should that happen.

Expected rate of return = SUM (probability *return)

Boom;(probability* return) = (0.15* 0.10) = 0.015 or 1.5%

Normal ;(probability* return) = (0.70* 0.04) = 0.028 or 2.8%

Recession ; (probability* return) = (0.15* -0.04) = -0.006 or -0.6%

Next, sum up the expected return for each state of the economy to find the expected rate of return on this stock;

= 1.5% + 2.8% -0.6%

= 3.7%

Therefore, the correct answer is choice B.

Thanks for taking the time to read You recently purchased a stock that is expected to earn 10 percent in a booming economy 4 percent in a normal economy and lose 4. We hope the insights shared have been valuable and enhanced your understanding of the topic. Don�t hesitate to browse our website for more informative and engaging content!

Rewritten by : Barada