A stock is expected to earn 36 percent in a boom economy, 20.00 percent in a nor
ID: 2649908 • Letter: A
Question
A stock is expected to earn 36 percent in a boom economy, 20.00 percent in a normal economy, and lose 20 percent in a recessionary economy. There is a 16 percent chance the economy will boom and a 60 percent chance the economy will be normal. What is the expected risk premium for this stock if the risk-free rate is expected to be 5.40 percent?
7.27 percent
6.16 percent
6.60 percent
7.56 percent
Stock
Number of Shares
Price per Share
A
500
13
B
200
28
C
800
26
D
400
15
53.47 percent
51.09 percent
56.48 percent
50.28 percent
A portfolio consists of 30 percent Stock A, 60 percent Stock B, and 10 percent Stock C. What is the portfolio expected return given the following:
State of Economy
Probability of State of Economy
Stock A Returns
Stock B Returns
Stock C Returns
Normal
0.60
22%
15%
38%
Recession
0.40
A stock is expected to earn 36 percent in a boom economy, 20.00 percent in a normal economy, and lose 20 percent in a recessionary economy. There is a 16 percent chance the economy will boom and a 60 percent chance the economy will be normal. What is the expected risk premium for this stock if the risk-free rate is expected to be 5.40 percent?
Explanation / Answer
Answer:-1:
Calculation of expected return of the stock:
Formula :
Expected return = (Return 1* Probability 1 ) + (Return 2* Probability 2 )+
(Return 3* Probability 3 )
= (36%*16%) + (20%*60%) + (-20%*(100-16-60)%)
= 12.96%
Expected risk premium = Expected Return on stock - Risk Free rate
=12.96% - 5.4%
=7.56%
Related Questions
drjack9650@gmail.com
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.