You recently purchased a stock that is expected to earn 24 percent in a booming

Question

You recently purchased a stock that is expected to earn 24 percent in a booming economy, 13 percent in a normal economy, and lose 2 percent in a recessionary economy. There is a 24 percent probability of a boom, a 61 percent chance of a normal economy, and a 15 percent chance of a recession. What is your expected rate of return on this stock?

Options:

2.86 percent

13.39 percent

12.33 percent

6.70 percent

11.67 percent

You recently purchased a stock that is expected to earn 24 percent in a booming economy, 13 percent in a normal economy, and lose 2 percent in a recessionary economy. There is a 24 percent probability of a boom, a 61 percent chance of a normal economy, and a 15 percent chance of a recession. What is your expected rate of return on this stock?

Explanation / Answer

Expected return of the stock in this scenario is the sum of all stocks' proability adjusted retrun.

Expected return = 24%*24%+61%*13%+15%*(-2%)= 13.39%

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