What is the expected return on a stock if the firm will earn 24% during a period of economic boom, 14% during normal economic periods, and 2% during a period of recession if the probabilities of these economic environments are 20%, 65%, and 15%, respectively?
What will be an ideal response?
The expected return is a weighted average of the individual possible returns, each weighted by the probability of their occurring: Expected return = (0.2)(0.24) + (0.65)(0.14) + (0.15)(0.02) = 14.2%.?
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