Question

The stock of blue water tours, inc. is expected to return 22.00 percent in a boom economy, 17.00 percent in a normal economy, and lose 16.00 percent in a recessionary economy. what is the expected rate of return on this stock if there is a 8.00 percent chance the economy booms, and an 84.00 percent chance the economy will be normal?

a. 13.59 percent
b. 14.51 percent
c. 14.76 percent
d. 15.24 percent

Answer 1

The correct answer is c. 14.76 percent. The expected rate of return on Blue Water Tours, Inc. stock, given an 8% chance of a boom, an 84% chance of a normal economy, and the rest being a recession, is 14.76%.

Step-by-step explanation:

To calculate the expected rate of return on the stock of Blue Water Tours, Inc., given the probabilities of different economic conditions, you can use the following formula:

Expected Return = (Probability of Boom * Return in Boom) + (Probability of Normal Economy * Return in Normal Economy) + (Probability of Recession * Return in Recession)

However, since we are not given the probability of a recessionary economy, we can deduce it by subtracting the probabilities of the other two states from 100%.

So the probability of a recession is 1 - (0.08 + 0.84) = 0.08 or 8%.

Now, we can calculate the expected return:

Expected Return = (0.08 * 22%) + (0.84 * 17%) + (0.08 * -16%)

Expected Return = (0.08 * 0.22) + (0.84 * 0.17) + (0.08 * -0.16)

Expected Return = 0.0176 + 0.1428 - 0.0128

Expected Return = 0.1476, or 14.76%