You recently purchased a stock that is expected to earn 22 percent in a booming economy, 9 percent in a normal economy, and lose 33 percent in a recessionary economy. There is a 5 percent probability of a boom and a 75 percent chance of a normal economy. What is your expected rate of return on this stock?
A)-3.40 percent
B)-2.25 percent
C)1.25 percent
D)2.60 percent
E)3.50 percent

Question

Quizplus · Accepted Answer

E(r) = (0.05 F1F1F1S1F1F1F10 0.22) + (0.75 F1F1F1S1F1F1F10 0.09) + (0.20 F1F1F1S1F1F1F10 -0.33) = 1.25 percent

You Recently Purchased a Stock That Is Expected to Earn