After some study of the economy, your forecast for next year is that a boom econ

Question

After some study of the economy, your forecast for next year is that a boom economy has a 30% chance of occurring, a neutral economy 50%, and a bust economy a 20% chance of occurring. You also estimate that a certain stock would have a return of 32% in a boom economy next year, 21% in a neutral economy , and -10% in a bust economy. The risk-free rate is 4.4%. What is the expected return for this stock next year?

Risk-Free Rate = 4.4%

Explanation / Answer

Solution :- Expected return for stock = 0.30 * 32 % + 0.50 * 21 % + 0.20 * (-) 10 %

= 9.60 % + 10.50 % - 2.00 %

= 18.10 %

Conclusion :- Expected return for the stock in the next year = 18.10 %.

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