The inferior goods co. stock is expected to earn 13% in a recession, 7% in a normal economy, and lose 6% in a booming economy. the probability of a boom is 20% while the probability of a normal economy is 55% and the chance of a recession is 25%. what is the expected rate of return on this stock?

Ans. The expected rate of return on the Inferior Goods Co. stock is 5.90%

Explanation:

Hi, you just have to multiply the expected earnings by the probability of occurance of a certain event and then add up all the products. Here is the information all organized to be processed.

Item                  ProbEarn

Booming           20%-6%

Normal           55%7%

Recession   25%13%

Ok, now let´s calculate the expected rate of return.

So the expected rate of return of the stock is 5.90%

Best of luck.

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