Expected return Samuel estimates that there are three possib

Expected return Samuel estimates that there are three possible return outcomes for a stock he is considering for purchase. He thinks that there is a 45% chance the economy will boom and his stock will return 22%, a 8% chance the economy will continue at its current pace and the stock will return 9% and a 47% the economy will fall into a recession and the stock will yield -4%. Given this, what is Samuel’s expected return on this stock he is considering for purchase?

Solution

The expected return = ( 45% *22%) + ( 8%* 9%) + (47% * -4%)

= 9.9% + 0.72% -1.88%

= 8.74%

Hence the correct answer is 8.74%