You are considering purchasing stock S.This stock 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 stock will:
A)increase as the probability of a boom economy increases.
B)increase as the probability of a recession increases.
C)vary inversely with the growth of the economy.
D)be equal to 75% of 8% if there is a 75% chance of a boom economy.
E)be equal to one-half of 8% if there is a 50% chance of an economic boom.

Question

Quizplus · Accepted Answer

The overall expected rate of return on the stock will increase as the probability of a boom economy increases. This is because the expected return during a boom period is higher than during a recession, and as the likelihood of a boom increases, the weighted average return on the stock will increase.

You Are Considering Purchasing Stock S