Asked by Keyla Ortiz on Jul 07, 2024
Verified
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.
Expected Return
The anticipated return on an investment, calculated as the weighted average of all possible returns with the probabilities of their occurrence.
Recessionary Period
denotes a time of economic decline when the economy reduces its activities significantly, typically marked by decreases in spending and increases in unemployment.
Economic Boom
A period of significantly increased economic activity characterized by high growth rates in GDP and employment.
- Understand how to compute the expected return on a portfolio and the role of portfolio weights.
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Learning Objectives
- Understand how to compute the expected return on a portfolio and the role of portfolio weights.
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