You recently purchased a stock that is expected to earn 12.6 percent in a booming economy,8.9 percent in a normal economy,and lose 5.2 percent in a recessionary economy.Each economic state is equally likely to occur.What is your expected rate of return on this stock?
A)6.47 percent
B)8.90 percent
C)5.43 percent
D)7.65 percent
E)7.01 percent

Question

Quizplus · Accepted Answer

The expected rate of return is calculated by multiplying each possible return by its probability and then summing those results. With each state equally likely, the probability of each is 1/3. Thus, the expected return is (12.6% * 1/3) + (8.9% * 1/3) + (-5.2% * 1/3) = 5.43%.

You Recently Purchased a Stock That Is Expected to Earn