Question

You recently purchased a stock that is expected to earn 24 percent in a booming economy, 13 percent in a normal economy, and lose 2 percent in a recessionary economy. There is 24 percent probability of a boom, 61 percent chance of a normal economy, and 15 percent chance of a recession. What is your expected rate of return on this stock

Answer 1

13.39%

Step-by-step explanation:

Calculation to determine the expected rate of return on this stock

Using this formula

E(r)=(Boom probability*Expected boom economy stock)+(Normal economy*Expected Normal Economy stock)+(Recession*Recession economy lose)

Let plug in the formula

E(r) = (.24 * .24) + (.61 * .13) + (.15 *- .02)

E(r)= .0576 + .0793- .003

E(r)= .1339*100

E(r)=13.39%

Therefore the expected rate of return on this stock will be 13.39%