The Rotor Co. stock is expected to earn 16% in a recession,7% in a normal economy,and lose 3% in a booming economy. The probability of a boom is 20% while the probability of a normal economy is 55% and the chance of a recession is 25%. What is the expected rate of return on this stock?
A) 6.67%
B) 7.25%
C) 7.32%
D) 8.40%
E) 12.50%

Question

Quizplus · Accepted Answer

The expected rate of return is calculated by multiplying each possible return by its probability and summing the results: (0.25 * 16%) + (0.55 * 7%) + (0.20 * -3%) = 4% + 3.85% - 0.6% = 7.25%.