Question

BPJ stock is expected to earn 14.8 percent in a recession, 6.3 percent in a normal economy, and lose 4.7 percent in a booming economy. The probability of a boom is 20 percent while the probability of a normal economy is 55 percent. What is the expected rate of return on this stock

Answer 1

Answer: 6.23%

Step-by-step explanation:

The expected return is a weighted average of the expected returns given the different economic conditions.

Probability of recession economy = 1 - 55% - 20 % = 25%

Expected return ;

= (14.8% * 25%) + (6.3% * 55%) + (-4.7% * 20%)

= 0.037 + ‭0.03465‬ ‭-0.0094‬

= ‭0.06225‬

= 6.23%