The common stock of Low Cost Foods is expected to earn 12percent in a booming...

The common stock of Low Cost Foods is expected to earn 12 percent in a booming economy, earn 8 percent in a normal economy, and lose 6 percent in a recession. The probability of a boom is 15 percent, the probability of a normal economy is 80 percent, and the chance of a recession is 5 percent. What is the expected rate of return on this stock?

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Expert Solution

We know that,

Expected Return = Wb*Rb + Wn*Rn + Wr*Rr

= 0.15*12 + 0.8*8 + 0.05*(-0.06)

= 7.9 % Answer

jeff jeffy answered 2 years ago

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