Albert estimates that there are three possible return outcomes for a stock he is considering for purchase.He thinks that there is a 35% chance the economy will boom and his stock will return 25%,a 50% chance the economy will continue at its current pace and the stock will return 8%,and finally,that there is a 15% chance that the economy will falter and the expected return on his stock will be -10%.Given these probabilities and conditional expected returns,what is Albert's expected return on the stock he is considering for purchase?
A)8.00%
B)11.25%
C)14.75%
D)15.25%

Question

Quizplus · Accepted Answer

Expected Return = (Chance of Boom x Expected Return during Boom) + (Chance of Current Pace x Expected Return during Current Pace) + (Chance of Falter x Expected Return during Falter)

Expected Return = (0.35 x 0.25) + (0.50 x 0.08) + (0.15 x (-0.10))
Expected Return = 0.0875 + 0.04 - 0.015
Expected Return = 0.1125 or 11.25%

Albert Estimates That There Are Three Possible Return Outcomes for a Stock