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You recently purchased a stock that is expected to earn 11 percent in a booming economy,...

You recently purchased a stock that is expected to earn 11 percent in a booming economy, 10 percent in a normal economy and lose 5 percent in a recessionary economy. There is a 15 percent probability of a boom, a 74 percent chance of a normal economy. What is your expected rate of return on this stock?

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Expert Solution

Information provided:

The rate of return in a boom economy=15%

The rate of return in a normal economy= 74%

The rate of return in a recessionary economy= 11%

Probability for a boom economy= 11%

Probability for a normal economy= 10%

Probability for a recessionary economy= 5%

Expected rate of return= 0.11*0.15 + 0.10*0.74 + 0.05*-0.11

                                     = 0.0165 + 0.0740 – 0.0055

                                     = 0.0850*100

                                     = 8.50%.

Therefore, the expected rate of return of the stock is 8.50%.

In case of any query, kindly comment on the solution.

jeff jeffy answered 1 year ago
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