If a project's expected return is 15%,which represents a 35% return in a booming economy and a 5% return in a stagnant economy,what is the probability of a booming economy?
A) 18.33%
B) 25.00%
C) 33.33%
D) 50.00%

Question

Quizplus · Accepted Answer

We can use the formula for expected return to solve for the probability of a booming economy:
Expected Return = (probability of booming economy x return in booming economy) + (probability of stagnant economy x return in stagnant economy)
15% = (P x 35%) + ((1-P) x 5%)
15% = 0.35P + 0.05 - 0.05P
0.10P = 0.10
P = 0.10/0.10 = 1
Therefore, the probability of a booming economy is 1, or 100%. However, this answer doesn't make sense because it implies that there is no possibility of a stagnant economy, which is unrealistic. Therefore, we need to check the answer choices and see which one is closest to a feasible probability. The closest answer choice is C) 33.33%. If we plug in 0.3333 for P, we get:
Expected Return = (0.3333 x 35%) + ((1-0.3333) x 5%)
Expected Return = 11.667% + 3.333%
Expected Return = 15%
Therefore, the probability of a booming economy is most likely 33.33%.

If a Project's Expected Return Is 15%,which Represents a 35