Question

You are considering buying stock A. If the economy grows rapidly, you may earn 40 percent on the investment, while a declining economy could result in a 15 percent loss. Slow economic growth may generate a return of 3 percent. If the probability is 12 percent for rapid growth, 27 percent for a declining economy, and 61 percent for slow growth, what is the expected return on this investment? Round your answer to one decimal place.

Answer 1

the expected return is 2.58%

Step-by-step explanation:

The computation of the expected return is shown below:

= respective weights × respective returns

= 40% × 12% + -15% × 27% + 3% × 61%

= 0.048 - 0.0405 + 0.0183

= 0.0258

= 2.58%

hence, the expected return is 2.58%