You are considering purchasing stock S. This stock has an expected return of 8% if the economy booms and 3% if the economy goes into a recessionary period. The overall expected rate of return on this stock will:

A) Be equal to one-half of 8% if there is a 50% chance of an economic boom.
B) Vary inversely with the growth of the economy.
C) Increase as the probability of a recession increases.
D) Be equal to 75% of 8% if there is a 75% chance of a boom economy.
E) Increase as the probability of a boom economy increases.

Question

Brittney Nichole · Accepted Answer

Final Answer : E, Explanation :  The overall expected rate of return on stock S will increase as the probability of a boom economy increases because a higher probability of a boom implies a higher weighted contribution of the 8% return to the overall expected return.

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