The common stock of Manchester & Moore is expected to earn 5 percent in a recess

Question

The common stock of Manchester & Moore is expected to earn 5 percent in a recession, 10 percent in a normal economy, and -10 percent in a booming economy. The probability of a boom is 20 percent while the probability of a recession is 10 percent. What is the expected rate of return on this stock?

The common stock of Manchester & Moore is expected to earn 5 percent in a recession, 10 percent in a normal economy, and -10 percent in a booming economy. The probability of a boom is 20 percent while the probability of a recession is 10 percent. What is the expected rate of return on this stock?

Explanation / Answer

Expected return = 20%*-10%+10%*5%+(100%-20%-10%)*10% = 5.50%

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