QUESTION 1 After studying the economy, you forecast that there is a 70% chance o

Question

QUESTION 1

After studying the economy, you forecast that there is a 70% chance of a good economy next year and a 30% chance of a poor economy. If the economy is good, you estimate that a stock you have been following would have a 21% return. Likewise, if the economy is poor, you estimate a -15% return for that same stock. The risk-free rate is 4.3%. What is the expected return for this stock? (Answer to the nearest tenth of a percent, but do not use a percent sign).

Probability

Return

Good Economy

70%

21%

Poor Economy

30%

-15%

Risk-Free Rate = 4.3

Probability

Return

Good Economy

70%

21%

Poor Economy

30%

-15%

Explanation / Answer

expected return for this stock=Respective returns*Respective probabilities

=(0.7*21)+(0.3*-15)

which is equal to

=10.2%

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