You are considering purchasing stock S. This stock has an expected return of 8%

Question

You are considering purchasing stock S. This stock has an expected return of 8% if the economy booms and 3% if the economy goes into a recessionary period. The overall expected rate of return on this stock will:

a) increase as the probability of a recession increases.

b) increase as the probability of a boom economy increases.

c) be equal to 75% of 8% if there is a 75% chance of a boom economy.

d) vary inversely with the growth of the economy.

e) be equal to one-half of 8% if there is a 50% chance of an economic boom.

Explanation / Answer

c) be equal to 75% of 8% if there is a 75% chance of a boom economy.

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