Hull Consultants, a famous think tank in the Midwest, has provided probability e

Question

Hull Consultants, a famous think tank in the Midwest, has provided probability estimates for the four potential economic states for the coming year. The probability of a boom economy is 15%, the probability of a stable growth economy is 19%, the probability of a stagnant economy is 52%, and the probability of a recession is 14%. Estimate the expected returns on the following individual investments for the coming year. STOCK: Boom - 29%, Stable Growth - 10%, Stagnant - 3%, Recession - -12% CORPORATE: Boom - 10%, Stable Growth - 7%, Stagnant - 5%, Recession - 4% GOVERNMENT BOND: Boom - 9%, Stable Growth - 6%, Stagnant - 4%, Recession - 3% ... What is the expected return of the stock investment?

Explanation / Answer

Expected return on the STOCK investment:

= 29%×0.15+10%×0.19+3%×0.52-12%×0.14

= 6.13%

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