A stock has the following probability distribution: If economy is good (the probability is 20%), its expected stock return is 20%; if economy is on average (the probability is 60%), its expected stock return is 10%; if economy is bad (the probability is 20%), its expected return is  -20%. Find the expected rate of return for the stock     4.0%     6.0%     10.0%     14.0%

Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
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A stock has the following probability distribution: If economy is good (the probability is 20%), its expected stock return is 20%; if economy is on average (the probability is 60%), its expected stock return is 10%; if economy is bad (the probability is 20%), its expected return is  -20%. Find the expected rate of return for the stock

   

4.0%

   

6.0%

   

10.0%

   

14.0%

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Step 1

The Expected rate of return is the total return expected by the investor under different situations or circumstances. It is calculated considering all the possible situations and accordingly loss or profit is calculated on a stock or an investment. It is basically the expected value of an investment or stock return under different scenarios.

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