You are considering purchasing Stock S.This stock has an expected return of 12 percent if the economy booms,8 percent if the economy is normal,and 3 percent if the economy goes into a recessionary period.The overall expected rate of return on this stock will:
A)be equal to one-half of 8 percent if there is a 50 percent chance of an economic boom.
B)vary inversely with the growth of the economy.
C)increase as the probability of a recession increases.
D)be independent of the probability of each economic state occurring.
E)increase as the probability of a boom economy increases.

Question

Quizplus · Accepted Answer

The overall expected rate of return on Stock S will increase as the probability of a boom economy increases, as the expected return for a boom is higher than for a normal or recessionary period. Therefore, there is a positive relationship between the probability of a boom and the overall expected rate of return.

You Are Considering Purchasing Stock S