17. You recently purchased a stock that is expected to earn 12.6 percent in a booming...

17. You recently purchased a stock that is expected to earn 12.6 percent in a booming economy and 5.2 percent in a recessionary economy. Each economic state is equally likely to occur. What is your expected rate of return on this stock?

Select one:

a. 5.2 percent

b. 8.9 percent

c. 12.6 percent

d. 7.4 percent

Solutions

Expert Solution

Q-17) Expected return in Booming economy = 12.6%

Expected return in recessionary economy = 5.2%

As each economic state is equally likely to occur so that weight of each of them is 0.50:0.50.

Expected Rate of Return on this stock = (Expected return in Booming economy)(Probability of Occurance) + (Expected return in recessionary economy)(Probability of Occurance)

=(12.6%)(0.50) + (5.2%)(0.50)

= 8.9%

So, expected rate of return on this stock is 8.9%

Option B

Q-18) Ans- Option D. Underpriced, in part, to counteract the winner's curse

jeff jeffy answered 2 years ago

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