Question

A stock is expected to return 8% in a normal economy, 12% if the economy booms, and lose 3% if the economy moves into a recessionary period. Economists predict a 56% chance of a normal economy, a 25% chance of a boom, and a 19% chance of a recession. The expected return on the stock is __%.

Answer 1

The expected return on the stock is calculated as the weighted average of the returns under different economic conditions, multiplied by their respective probabilities of occurring, resulting in 6.91%.

Step-by-step explanation:

The expected return on the stock can be calculated using the probabilities of the different economic conditions provided and their respective returns. To calculate this, you would multiply each return by the probability of its occurrence and then add all of these products together.

1. Normal economy return: 8% * 56% = 4.48%
2. Boom economy return: 12% * 25% = 3%
3. Recession economy return: -3% * 19% = -0.57%

Adding these up: 4.48% + 3% - 0.57% = 6.91%. Therefore, the expected return on the stock is 6.91%.

Answer 2

Answer: 6.91%

Step-by-step explanation:

Expected return = Sum of (Probability of state of economy * Return given state of economy)

= (56% * 8%) + (12% * 25%) + (19% * -3%)

= 4.48% + 3% - 0.57%

= 6.91%