Given the following information, what is the expected return of Stock Z? State Probability Return if State Occurs Stock Z Stock N Boom 14% 20% 5% Normal 80% 13% 9% Recession 6% -31% 18% ANSWERS: 0.67% 5.68% 14.75% 11.34% 8.98%
Added by Santiago D.
Step 1
Calculate the expected return for each state of the economy: - Boom: (0.14 x 20%) + (0.86 x 5%) = 2.8% + 4.3% = 7.1% - Normal: (0.8 x 13%) + (0.2 x 9%) = 10.4% + 1.8% = 12.2% - Recession: (0.06 x -31%) + (0.94 x 18%) = -1.86% + 16.92% = 15.06% Show more…
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