You own a stock which is expected to return 14 percent in a booming economy and 9 percent in a normal economy.If the probability of a booming economy decreases,your expected return will:
A) decrease.
B) either remain constant or decrease.
C) remain constant.
D) increase.
E) either remain constant or increase.

Question

Quizplus · Accepted Answer

If the probability of a booming economy decreases, it means that the probability of a normal economy increases. Since the expected return in a normal economy is lower than in a booming economy, the overall expected return will decrease. Therefore, the answer is A.

You Own a Stock Which Is Expected to Return 14