Question

A stock is expected to return 11% in a normal economy, 19% if the economy booms, and lose 8% if the economy moves into a recessionary period. The economists predict a 65% chance of a normal economy, a 25% chance of a boom, and a 10% chance of a recession. What is the expected return on the stock?A.11.10%B. 11.23%C. 12.06%D. 11.98%

Answer 1

Answer:

Expected Return  = 11.10 %

so correct option is A. 11.10%

Explanation:

given data

return in normal economy = 11%

economy booms = 19%

economy moves loss = 8%

economists predict = 65%

boom = 25 %

chance of  recession = 10%

to find out

What is the expected return on the stock

solution

we get here Expected Return for all that is

State of Economy          Probability              Return         Expected Return

Normal                                65%                         11%                0.0715

Booms                                 25%                         19%               0.0475

Recessionary                       10%                         -8%               -0.0080

Expected Return                                                                       0.1110

as here Expected Return=  Probability  ×  Expected Return   ..............1

Expected Return  = 11.10 %

so correct option is A. 11.10%