A stock is expected to return 13 percent in an economic boom, 10 percent in a normal economy, and 3 percent in a recessionary economy.Which one of the following will lower the overall expected rate of return on this stock?
A)An increase in the rate of return in a recessionary economy
B)An increase in the probability of an economic boom
C)A decrease in the probability of a recession occurring
D)A decrease in the probability of an economic boom
E)An increase in the rate of return for a normal economy

Question

Quizplus · Accepted Answer

A decrease in the probability of an economic boom will lower the overall expected rate of return because the higher return associated with the boom will have less weight in the calculation of the expected return.

A Stock Is Expected to Return 13 Percent in an Economic