You have done a thorough study of the economy and of Stock X and concluded the following probabilities:
$\bullet$having a boom next year is 20.0%
$\bullet$having a stable economy is 55.0%
$\bullet$having a recession is 25.0%.
You have also found the price of Stock X will be:
$\bullet$$45 if there is a boom
$\bullet$$25 if the economy is stable
$\bullet$$15 if there is a recession.
What is the ex ante expected return on Stock X if it is currently selling for $24?
A)-9.43%
B)10.42%
C)18.06%
D)26.50%

Question

Quizplus · Accepted Answer

To calculate the ex ante expected return, we first need to find the expected price of the stock in the next year based on the given probabilities:

Expected price = (20.0% x $45) + (55.0% x $25) + (25.0% x $15) = $26

Next, we can calculate the expected return as the percentage increase in price from the current price of $24:

Expected return = ($26 - $24) / $24 = 0.0833 or 8.33%

Therefore, the answer is B) 10.42%, as it is the closest option to the calculated expected return of 8.33%.

You Have Done a Thorough Study of the Economy and of Stock