You recently purchased a stock that is expected to earn 29 percent in a booming

Question

You recently purchased a stock that is expected to earn 29 percent in a booming economy, 18 percent in a normal economy, and lose 5 percent in a recessionary economy. There is a 26 percent probability of a boom, a 66 percent chance of a normal economy, and a 8 percent chance of a recession. What is your expected rate of return on this stock?

You recently purchased a stock that is expected to earn 29 percent in a booming economy, 18 percent in a normal economy, and lose 5 percent in a recessionary economy. There is a 26 percent probability of a boom, a 66 percent chance of a normal economy, and a 8 percent chance of a recession. What is your expected rate of return on this stock?

Explanation / Answer

P(Boom) = 0.26

P(Normal) = 0.66

P(recession) = 0.08

Expected return = 29(0.26) + 18 (0.66) - 5(0.08) = 19.02 percent

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