You are considering purchasing stock S. This stock has an expected return of 8% if the economy booms and 3% 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% if there is a 50% 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 equal to 75% of 8% if there is a 75% chance of a boom economy.
E) increase as the probability of a boom economy increases.

Question

Quizplus · Accepted Answer

The overall expected rate of return on the stock will increase as the probability of a boom economy increases. This is because the expected return on the stock is higher during an economic boom, and a higher likelihood of a boom means there is a higher probability of realizing that expected return.

You Are Considering Purchasing Stock S