Question

Pl lumber stock is expected to return 22 percent in a booming economy, 15 percent in a normal economy, and lose 2 percent in a recession. the probabilities of an economic boom, normal state, or recession are 5 percent, 92 percent, and 3 percent, respectively. what is the expected rate of return on this stock?

Answer 1

Expected rate of return Probabilities
Booming 22% 5%
Normal 15% 92%
Recession 2% 3%

The expected rate of return on this stock is solved by multiply each expected rate of return to its corresponding probability and getting the sum of all products.

Booming: 0.22 x 0.05 = 0.011
Normal: 0.15 x 0.92 = 0.138
Recession 0.02 x 0.03 = 0.0006
Sum total 0.1496 or 14.96% is the expected rate of return on this stock