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Consider the following information:
Probability of State Rate of Return if State Occurs
Economy of Economy Stock A Stock B
Recession .20 .010 – .35
Normal .55 .090 .25
Boom .25 .240 .48
a. Calculate the expected return for the two stocks.'

Respuesta :

Answer:

11.15%

Explanation:

The formula to compute the expected rate of return is shown below:

Expected rate of return = (Recession probability× Possible Returns ) + (Normal Probability  × Possible Returns ) + (Boom Probability  × Possible Returns 3)

= (0.20 × 0.010) + (0.55 × 0.090) + (0.25 × 0.240)

= 0.002+ 0.0495 + 0.06

= 11.15%

Simply we multiply the probability with its return so that accurate rate could come.

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