Question

You recently purchased a stock that is expected to earn 11 percent in a booming economy, 5 percent in a normal economy, and lose 3 percent in a recessionary economy. There is 15 percent probability of a boom, 72 percent chance of a normal economy, and 13 percent chance of a recession. What is your expected rate of return on this stock?

Multiple Choice

• 7.69%

• 4.86%

• 4.33%

• 2.43%

• 5.33%

Answer 1

expected rate of return=respective return*Respective probability

=(11*0.15)+(5*0.72)+(-3*0.13)

=4.86%