Question

Consider the following information:

Probability of State Rate of Return if State Occurs
Economy of Economy Stock A Stock B
Recession .20 .010 – .35
Normal .55 .090 .25
Boom .25 .240 .48
a. Calculate the expected return for the two stocks.'

Answer 1

11.15%

Step-by-step explanation:

The formula to compute the expected rate of return is shown below:

Expected rate of return = (Recession probability× Possible Returns ) + (Normal Probability × Possible Returns ) + (Boom Probability × Possible Returns 3)

= (0.20 × 0.010) + (0.55 × 0.090) + (0.25 × 0.240)

= 0.002+ 0.0495 + 0.06

= 11.15%

Simply we multiply the probability with its return so that accurate rate could come.