Question

You are evaluating a stock return. You are expecting the stock return to change based on economy status. You are expecting that the probability of recession is 20%, normal is 30% and boom is 50%, and returns are -5%, 10%, and 13% respectively. What is the expected rate of return on this stock

Answer 1

The expected rate of return on this stock is 8.5%

Step-by-step explanation:

The expected rate of return is shown below:

= Recession probability × return + normal probability × return + boom probability × return

= 20% × -5% + 30% × 10% + 50% × 13%

= -1% + 3% + 6.5%

= 8.5%

Hence, the expected rate of return on this stock is 8.5%

We simply applied the above formula

The same is to be considered