Inferior Goods SpA equity is expected to earn 14% in a boom, 6% in a normal economy, and lose 4% in a recession economy.The probability of a boom is 20% while the probability of a normal
Economy is 55% and the chance of a recession is 25%.What is the expected rate of return on this
Share?
A)5.10%
B)6.72%
C)6.80%
D)7.60%
E)11.33%

Question

Quizplus · Accepted Answer

The expected rate of return is the weighted average of the possible returns, where the weights are the probabilities of each return. In this case, the expected rate of return is:(0.20 * 14%) + (0.55 * 6%) + (0.25 * -4%) = 5.10%

Inferior Goods SpA Equity Is Expected to Earn 14% in a Boom