Ronnie estimates that there are three possible return outcomes for a stock he is
ID: 2701791 • Letter: R
Question
Ronnie 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 25%, a 50% chance the economy will continue at its current pace and the stock will return 8%, and finally, that there is a 5% chance that the economy will falter and the expected return on his stock will be -10%. Given these probabilities and conditional expected returns, what is Ronnie's expected return on the stock he is considering for purchase?
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Explanation / Answer
expected return is 0.45 * 25 + 0.5 * 8 + 0.05 * ( -10 ) = 14.75%
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