Question: What is the expected return on a stock if the firm will earn 20% during a period of economic boom, 10% during normal economic periods,
What is the expected return on a stock if the firm will earn 20% during a period of economic boom, 10% during normal economic periods, and 5% during a period of recession if the probabilities of these economic environments are 20%, 65%, and 15%, respectively?
| Economic Environment | Expected Return | Probability of Environment |
|---|---|---|
| Boom | 20% | 20% |
| Normal | 10% | 65% |
| Recession | 5% | 15% |
SHOW ALL YOUR CALCULATIONS TO GET CREDIT. IF YOU USED A FINANCIAL CALCULATOR OR EXCEL SPREADSHEET, LIST THE INPUTS YOU USED.
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