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The stock of Blue Water Tours, Inc. is expected to return 14.00 percent in a boom...

The stock of Blue Water Tours, Inc. is expected to return 14.00 percent in a boom economy, 9.00 percent in a normal economy, and lose 8.00 percent in a recessionary economy. What is the expected rate of return on this stock if there is a 10.00 percent chance the economy booms, and an 85.00 percent chance the economy will be normal?

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Answer #1

The expected return is computed as shown below:

= 0.14 x 0.10 + 0.09 x 0.85 - 0.08 x ( 1 - 0.10 - 0.85 )

= 8.65%

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