Ronnie estimates that there are three possible return outcomes for a stock he is considering for purchase
He thinks that there is a 45% chance the economy will boom and his stock will return 25%, a 50% chance the economy will continue at its current pace and the stock will return 8%, and finally, that there is a 5% chance that the economy will falter and the expected return on his stock will be -10%. Given these probabilities and conditional expected returns, what is Ronnie's expected return on the stock he is considering for purchase?
A) 8.00%
B) 11.25%
C) 14.75%
D) 15.25%
Answer: C
Explanation: C) Expected payoff = Σ payoffi × probabilityi = .45 ∗ 25% + .50 ∗ .08% + .05% ∗ -10% = 14.75%.
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