You recently purchased a stock that is expected to earn 12% in a booming economy,8% in a normal economy and lose 5% in a recessionary economy. There is a 15% probability of a boom,a 75% chance of a normal economy,and a 10% chance of a recession. What is your expected rate of return on this stock?
A) 5.00%
B) 6.45%
C) 7.30%
D) 7.65%
E) 8.30%

Question

Quizplus · Accepted Answer

The expected rate of return is calculated by multiplying each possible return by its probability and summing the results: (0.15 * 12%) + (0.75 * 8%) + (0.10 * -5%) = 7.30%.

You Recently Purchased a Stock That Is Expected to Earn