You have done a thorough study of the economy and of Stock X and concluded the following probabilities: having a boom next year is 20 percent,having a stable economy is 55 percent,and having a recession is 25 percent.You have also found the price of Stock X will be: $45 if there is a boom,$25 if the economy is stable,and $15 if there is a recession.What is the ex ante expected return on Stock X if it is currently selling for $24?
A) -9.43%
B) 10.42%
C) 18.06%
D) 26.50%

Question

Quizplus · Accepted Answer

Compute P₁ = $45*20% + $25*55% + $15*25% = $26.50 The ex ante expected return,E(R)= ($26.5-$24)/$24 = 10.42%

You Have Done a Thorough Study of the Economy and of Stock