Suppose a stock will have a return of -9% during a recession, and a return of 18% with normal market condition

Finance Dec 26, 2020

Suppose a stock will have a return of -9% during a recession, and a return of 18% with normal market condition. If over the next year, the chance of recession is 32%, and the chance of normal condition is 68%. What is the stock's expected return for the next year (in percentage terms)?

Expert Solution

Expected return=Respective return*Respective probability

=(0.68*18)+(0.32*-9)

which is equal to

=9.36%

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