Question

Crabby Shores stock is expected to return 15.7 percent in a booming economy, 9.8 percent in a normal economy, and 2.3 percent in a recession. The probabilities of an economic boom, normal state, or recession are 15 percent, 73 percent, and 12 percent, respectively. What is the expected rate of return on this stock?

Multiple Choice 

10.74 percent 10.61 percent 10.07 percent 9.79 percent 8.68 percent

Answer 1

The expected rate of return is computed as shown below:

= Return in booming economy x probability of boom economy + Return in normal economy x probability of normal economy + Return in recession economy x probability of recession economy

= 0.157 x 0.15 + 0.098 x 0.73 + 0.023 x 0.12

= 9.79% Approximately