You recently purchased a stock that is expected to earn 25% in a booming economy,9% in a normal economy and lose 8% in a recessionary economy. There is a 15% probability of a boom,a 65% chance of a normal economy,and a 10% chance of a recession. What is your expected rate of return on this stock?
A) 7.65%
B) 8.05%
C) 8.67%
D) 8.83%
E) 9.00%

Question

Quizplus · Accepted Answer

To find the expected rate of return, we need to multiply the probability of each economic state by the return associated with that state, and then sum these products. Therefore:

Expected rate of return = (0.15 x 0.25) + (0.65 x 0.09) + (0.10 x (-0.08))
Expected rate of return = 0.0375 + 0.0585 - 0.008
Expected rate of return = 0.088

Therefore, the expected rate of return on this stock is 8.8%, which closely matches the option B).

You Recently Purchased a Stock That Is Expected to Earn