Question

Crabby shores stock is expected to return 15.7 percent in a booming economy, 9.8 percent in a normal economy, and 2.3 percent in a recession. the probabilities of an economic boom, normal state, or recession are 15 percent, 73 percent, and 12 percent, respectively. what is the expected rate of return on this stock? group of answer choices

O 9.79 percent
O 10.61 percent
O 10.07 percent
O 8.68 percent
O 10.74 percent

Answer 1

The expected rate of return on the stock is 9.785%. Option (A) is correct.

Step-by-step explanation:

The expected return is the amount of profit or loss an investor can anticipate receiving on an investment. An expected return is calculated by multiplying potential outcomes by the odds of them occurring and then totaling these results. Expected returns cannot be guaranteed.

To calculate the expected rate of return on the stock, we need to multiply each possible rate of return by its corresponding probability, and then sum up the results. Let's calculate:

1. Expected rate of return = (Boom rate of return x Boom probability) + (Normal rate of return x Normal probability) + (Recession rate of return x Recession probability)
2. Expected rate of return = (0.157 x 0.15) + (0.098 x 0.73) + (0.023 x 0.12)
3. Expected rate of return = 0.02355 + 0.07154 + 0.00276
4. Expected rate of return = 0.09785

So, the expected rate of return on the stock is 9.785% (rounded to two decimal places).

The expected rate of return is a percentage return expected to be earned by an investor during a set period of time, for example, year, quarter, or month. In other words, it is a percentage by which the value of investments is expected to exceed its initial value after a specific period of time.