You recently purchased a stock that is expected to earn 19 percent in a booming economy, 12 percent in a normal economy, and lose 8 percent in a recessionary economy. The probability of a boom economy is 16 percent while the probability of a normal economy is 78 percent. What is your expected rate of return on this stock?

Question

Business

Annalise Morse

26 April, 18:19

You recently purchased a stock that is expected to earn 19 percent in a booming economy, 12 percent in a normal economy, and lose 8 percent in a recessionary economy. The probability of a boom economy is 16 percent while the probability of a normal economy is 78 percent. What is your expected rate of return on this stock?

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Answers (1)

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Tony Doyle · Answer 1

The expected rate of return on this stock 11.92%.

Explanation:

E (r) = (0.16 * 0.19) + (0.78 * 0.12) + (0.06 * - 0.08)

= 0.0304 + 0.0936 - 0.0048

= 0.1192

= 11.92%