You recently purchased a stock that is expected to earn 30 percent in a booming economy, 9 percent in a normal economy, and lose 33 percent in a recessionary economy. there is a 5 percent probability of a boom and a 75 percent chance of a normal economy. what is your expected rate of return on this stock?

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Business

Shuttershy

9 December, 09:29

You recently purchased a stock that is expected to earn 30 percent in a booming economy, 9 percent in a normal economy, and lose 33 percent in a recessionary economy. there is a 5 percent probability of a boom and a 75 percent chance of a normal economy. what is your expected rate of return on this stock?

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Darby · Answer 1

Took me a bit to understand what this is. I have no business sense at all.

Expected Rate of Return = 30%*5% + 9%*75% - 33% * (100 - 75 - 5) %

Expected Rate of Return = 0.015 + 0.0675 - 33%*20%

Expected Rate of Return = 0.015 + 0.0675 - 0.066

Expected Rate of Return = 0.0165

This then is expressed as a %

0.0165 = 1.65 % Sounds like you are buying a US short term treasury.

If anyone else answers, take their answer.