Midwest Fastener Supply stock is expected to return 16 percent in a booming economy, 12percent in a normal economy, and -3 percent in a recession.The probabilities of an economic boom, normal state, or recession are 12 percent, 80 percent, and 8 percent, respectively.What is the expected rate of return on this stock?
A)11.28 percent
B)10.67 percent
C)10.95 percent
D)11.91 percent
E)11.70 percent

Question

Quizplus · Accepted Answer

The expected rate of return is the weighted average of the possible returns, where the weights are the probabilities of each return. In this case, the expected rate of return is:(0.12 * 0.16) + (0.80 * 0.12) + (0.08 * -0.03) = 0.1128 or 11.28%

Midwest Fastener Supply Stock Is Expected to Return 16 Percent