The economy has been very volatile lately

Marketing Dec 20, 2020

The economy has been very volatile lately. There is a 40% chance of recession and a 60% chance of a boom. Stock A would have a return of -15% if there was a recession but, a 40% return in a boom economy. What is the expected return for Stock A?

Expert Solution

State	Probability	Return
Recession	40%	-15%
Boom	60%	40%

The expected return formula is as follows:

Expected return=∑Return×ProbabilityExpected return=∑Return×Probability

Expected return=−15%×40100+40%×60100Expected return=−15%×40100+40%×60100

Expected return=18%

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