You live in a world where three future states are possible: Boom, Normal and Recession. See the probablities of these states in the attched table. Consider a stock which you expected to have the following returnsin these states of the economy.State ProbabilityBoomNormalRecessionO 9.05%O 7.35%What is the expected return on an investment in this stock?6.00%25%55%20%O 3.75%StateExpectedReturn0.150.08-0.04

Expected rate is the weighted rate of return based on the probability of happening the event over…

live in a world where three future states are pos these states of the economy. State Probability om 0.15 ormal 0.08 cession -0.04 hat is the expected return on an investment in this 9.05% 7.35% 6.00% 3.75% State Expected Return 25% 55% 20%

live in a world where three future states are pos these states of the economy. State Probability om 0.15 ormal 0.08 cession -0.04 hat is the expected return on an investment in this 9.05% 7.35% 6.00% 3.75% State Expected Return 25% 55% 20%

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

Section: Chapter Questions

Problem 1PS

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Question

You live in a world where three future states are possible: Boom, Normal and Recession. See the probablities of these states in the attched table. Consider a stock which you expected to have the following returns
in these states of the economy.
State Probability
Boom
Normal
Recession
O 9.05%
O 7.35%
What is the expected return on an investment in this stock?
6.00%
25%
55%
20%
O 3.75%
State
Expected
Return
0.15
0.08
-0.04

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