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Assume the economy has a 12 percent chance of booming, a 4 percent chance of being recessionary, and being normal the remainder of the time. A stock is expected to return 18.7 percent in a boom, 14.4 percent in a normal economy, and lose 12 percent in a recession. What is the expected rate of return on this stock

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abiolataiwo2015

Answer :

13.86%

Explanation:

Calculation of the Expected rate of return

First step

Expected return = (.12 x.187) + (.84 x.144) + [.04 x(-.12)]

Second step

Expected return =(0.02244)+(0.12096)+ (-0.0048)

Expected return=0.1386 ×100

Expected return=13.86%

Therefore the Expected return would be 13.86%

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