You recently purchased a stock that is expected to earn 19 percent in a booming

Question

You recently purchased a stock that is expected to earn 19 percent in a booming economy, 14 percent in a normal economy, and lose 3 percent in a recessionary economy. There is a 21 percent probability of a boom, a 70 percent chance of a normal economy, and a 9 percent chance of a recession. What is your expected rate of return on this stock?

3.33 percent

13.52 percent

6.76 percent

10.00 percent

11.00 percent

You recently purchased a stock that is expected to earn 19 percent in a booming economy, 14 percent in a normal economy, and lose 3 percent in a recessionary economy. There is a 21 percent probability of a boom, a 70 percent chance of a normal economy, and a 9 percent chance of a recession. What is your expected rate of return on this stock?

3.33 percent

13.52 percent

6.76 percent

10.00 percent

11.00 percent

Explanation / Answer

b) 13.52% Statement showing computation of Return Economy Weight Return Expected Return Booming   0.21 19% 3.99% Normal 0.70 14% 9.80% Recession 0.09 -3% -0.27%                                1.00 13.52%

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