Question

Use the following information on states of the economy and stock returns to calculate the expected return for Dingaling Telephone: (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places.)

State of   Economy	Probability of State of Economy		Security Return If State Occurs
Recession	0.4		-11	%
Normal	0.2		16
Boom	?		23

Answer 1

Probability of boom economy= 1 – (0.4 + 0.2)

                                                         = 1 – 0.6

                                                         = 0.4

Expected return= 0.4*-11% + 0.2*16% + 0.4*23%

                               = -4.40% + 3.20% + 9.20%

                               = 8%.

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