A stock is expected to return 13 per cent in an economic boom,10 per cent in a normal economy,and 3 per cent 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 probability of an economic boom
B)an increase in the rate of return for a normal economy
C)an increase in the rate of return in a recessionary economy
D)a decrease in the probability of an economic boom
E)a decrease in the probability of a recession occurring

Question

Quizplus · Accepted Answer

A decrease in the probability of an economic boom will lower the overall expected rate of return on this stock because the return during a boom is higher than the returns in other economic situations. Therefore, if there is less likelihood of a boom, the overall expected rate of return will be lower.

A Stock Is Expected to Return 13 Per Cent in an Economic