Terry owns a stock that is expected to earn 8.7 percent in a booming economy,9.2 percent in a normal economy,and 12.6 percent in a recessionary economy.Each economic state is equally likely to occur.What is his expected rate of return on this stock?
A)10.38 percent
B)11.90 percent
C)10.17 percent
D)9.98 percent
E)11.01 percent

Question

Quizplus · Accepted Answer

To calculate the expected rate of return, we take the weighted average of the return in each economic state, using the probability of each state as the weight. So, the expected rate of return is: 
(0.33 x 8.7%) + (0.33 x 9.2%) + (0.33 x 12.6%) = 2.871% + 3.036% + 4.158% = 10.07% or 10.17% (rounded to two decimal places). Therefore, the best choice is C.

Terry Owns a Stock That Is Expected to Earn 8