Terry owns a stock that is expected to earn 8.7 percent in a booming economy, 9.2...

Terry owns a stock that is expected to earn 8.7 percent in a booming economy, 9.2 percent in a normal economy, and 12.6 percent in a recessionary economy. Each economic state is equally likely to occur. What is his expected rate of return on this stock?

9.98 percent
11.90 percent
11.01 percent
10.38 percent
10.17 percent

Expert Solution

Expected return = (Probability of Recession * Returns at Recession) + (Probability of Normal * Returns at Normal) + (Probability of Boom * Returns at Boom)

Expected return = [(1/3) * 0.126] + [(1/3) * 0.092] + [(1/3) * 0.087]

Expected return = 0.1017 or 10.17 percent

jeff jeffy answered 2 years ago

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