Southern Wear stock has an expected return of 15.1 percent.The stock is expected to lose 8 percent in a recession and earn 18 percent in a boom.The probabilities of a recession, a normal economy, and a boom are 2 percent, 87 percent, and 11 percent, respectively.What is the expected return on this stock if the economy is normal?
A)14.79 percent
B)17.04 percent
C)15.26 percent
D)16.43 percent
E)11.08 percent

Question

Quizplus · Accepted Answer

The expected return in a normal economy can be calculated using the formula for expected return: E(R) = (Probability of Recession * Return in Recession) + (Probability of Normal Economy * Return in Normal Economy) + (Probability of Boom * Return in Boom). Given the overall expected return is 15.1%, and using the probabilities and returns for recession and boom, we can solve for the return in a normal economy, which is 15.26%.

Southern Wear Stock Has an Expected Return of 15