You recently purchased a stock that is expected to earn 26 percent in a booming

Question

You recently purchased a stock that is expected to earn 26 percent in a booming economy, 15 percent in a normal economy, and lose 4 percent in a recessionary economy. There is a 27 percent probability of a boom, a 63 percent chance of a normal economy, and a 10 percent chance of a recession. What is your expected rate of return on this stock?

You recently purchased a stock that is expected to earn 26 percent in a booming economy, 15 percent in a normal economy, and lose 4 percent in a recessionary economy. There is a 27 percent probability of a boom, a 63 percent chance of a normal economy, and a 10 percent chance of a recession. What is your expected rate of return on this stock?

Explanation / Answer

expected rate of return on this stock= 26%*27% + 15%*63% + (-4%)*10%= 16.07 percent

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