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1) Sue purchased a stock for $25 a share, held it for one year, received a $1
1) Sue purchased a stock for $25 a share, held it for one year, received a $1.34 dividend,
and sold the stock for $26.45. What nominal rate of return did she earn?
2) A stock is expected to return 11% in a normal economy, 19% if the economy booms,
and lose 8% if the economy moves into a recessionary period. Economists predict a 65%
chance of a normal economy, a 25% chance of a boom, and a 10% chance of a recession.
What is the expected return on the stock?
Expert Solution
1) Computation of the nominal rate of return:-
Nominal rate of return = ( Ending price + Dividends - Beginning price) / Beginning price
= ($26.45 + $1.34 - $25) / $25
= $2.79 / $25
= 11.16%
2) Expected return on stock = 11.10%
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