You are considering purchasing share S.This share has an expected return of 8% if the economy booms and 3% if the economy goes into a recessionary period.The overall expected rate of return on this share will:
A)be equal to one-half of 8% if there is a 50% chance of an economic boom.
B)vary inversely with the growth of the economy.
C)increase as the probability of a recession increases.
D)be equal to 75% of 8% if there is a 75% chance of a boom economy.
E)increase as the probability of a boom economy increases.

Question

Quizplus · Accepted Answer

The overall expected rate of return on the share will increase as the probability of a boom economy increases because the expected return of the share is higher in a booming economy (8%) than in a recessionary period (3%). Therefore, as the chances of a boom increase, the overall expected rate of return will increase.

You Are Considering Purchasing Share S