Market analysts forecast that the economy in future would be either steady or boom or in recession with a probability of 40%, 35% and 25% respectively

Accounting Jun 22, 2021

Market analysts forecast that the economy in future would be either steady or boom or in recession with a probability of 40%, 35% and 25% respectively. If annual returns of AB Company shares are 8.5%, 15.6% and 4.25% under each economic condition respectively, what would be the expected return in future? a) 9.45% b) 9.92% c) 8.78% d) 10.25%

Expert Solution

Answer

b )

Explanation

Computation of Expected Return:
State of Economy	Probability	Returns	*ProbabilityReturn**
Steady	40%	8.50%	3.40%
Boom	35%	15.60%	5.46%
Recession	25%	4.25%	1.06%
		Expected Return =	9.92%

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