Ajax common stock is expected to return 17 percent in a boom economy, 11 percent in a normal economy, and 2 percent in a recession. The probability of a boom is 25 percent, of a normal economy is 70 percent, and of a recession is 5 percent. What is the expected return on this stock?

Question

Business

Valentina Frederick

31 December, 13:19

Ajax common stock is expected to return 17 percent in a boom economy, 11 percent in a normal economy, and 2 percent in a recession. The probability of a boom is 25 percent, of a normal economy is 70 percent, and of a recession is 5 percent. What is the expected return on this stock?

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Answers (1)

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Stanley Acevedo · Answer 1

Expected Value of the return = 12.1%

Explanation:

The expected rate of return is the weighted average of all the possible returns associated with an investment decision. The returns are weighted using the probability associated with their outcomes.

Expected return = WaRa + Wb+Rb + Wn+Rn

W - weight of the outcome, R - return of the outcome

W - Probability of the expected outcome, R - expected return under a circumstance

Expected Value of the return

(0.25 * 17%) + (0.7 * 11%) + (0.05 * 2%) = 0.1205

=0.1205 * 100

= 12.1%

Expected Value of the return = 12.1%