The Inferior Goods Co.stock is expected to earn 13% in a recession,7% in a normal economy,and lose 6% in a booming 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 stock?
A)5.00%
B)5.90%
C)6.80%
D)7.60%
E)11.33%

Question

Quizplus · Accepted Answer

To find the expected rate of return, we multiply each possible rate of return by its corresponding probability and add them up.

Expected rate of return = (0.25 x 0.13) + (0.55 x 0.07) + (0.20 x -0.06)
Expected rate of return = 0.0325 + 0.0385 - 0.012
Expected rate of return = 0.0585 or 5.85%

Therefore, the closest option to this is answer B: 5.90%.