You recently purchased a stock that is expected to earn 15 p

You recently purchased a stock that is expected to earn 15 percent in a booming economy, 10 percent in a normal economy, and lose 3 percent in a recessionary economyThere is a 18 p a 62 percent chance of a normal economy, and a 20 percent chance of a recession. What is your expected rate of return on this stock? percent probabity of a boom, O 7.33 percent 4.15 percent O 4.55 percent O 8.30 percent O 8.33 percent

Solution

Solution: Answer is 4th option 8.30 percent Working Notes: Economy state Probability Return Boom 0.18 15% Normal 0.62 10% Recession 0.20 -3% Expected rate of return of this stock = Sum of (probability x return) =0.18 x 15% + 0.62 x 10% + 0.20 x (-3%) =8.30% Please feel free to ask if anything about above solution in comment section of the question.