Question

Ou recently purchased a stock that is expected to earn 28 percent in a booming economy, 17 percent in a normal economy, and lose 2 percent in a recessionary economy. there is 27 percent probability of a boom, 65 percent chance of a normal economy, and 8 percent chance of a recession. what is your expected rate of return on this stock? multiple choice

O 9.22%
O 2.33%
O 18.45%
O 14.33%
O 15.00%

Answer 1

The expected rate of return on the stock is calculated by multiplying each potential return by its probability and summing the results. The calculation yields an expected rate of return of 14.33%, which is represented by option D.

Step-by-step explanation:

The correct answer is option D. To calculate the expected rate of return on this stock, you multiply the return in each economic scenario by the probability of that scenario occurring and then sum these products. Here is the calculation:

• (28% × 27%) = 7.56%
• (17% × 65%) = 11.05%
• (-2% × 8%) = -0.16%

Adding these up gives an expected rate of return of 14.33%. Thus, based on the provided probabilities and returns for each economic condition, the expected rate of return accurately reflects the weighted average of the potential outcomes.

To calculate the expected rate of return, we multiply the probability of each economy state with the corresponding rate of return and sum up the results.

Expected rate of return = (Probability of boom x Rate of return in boom) + (Probability of normal economy x Rate of return in normal economy) + (Probability of recession x Rate of return in recession)

Expected rate of return = (0.27 x 0.28) + (0.65 x 0.17) + (0.08 x -0.02)

Expected rate of return = 0.0756 + 0.1105 - 0.0016

Expected rate of return = 0.1845 or 18.45%