You Recently Purchased a Stock That Is Expected to Earn

question 377

Multiple Choice

You recently purchased a stock that is expected to earn 19% in a booming economy, 11% in a normal economy and lose 15% in a recessionary economy. There is a 20% probability of a boom, a 65%
Chance of a normal economy, and a 15% chance of a recession. What is your expected rate of return
On this stock?

• A) 6.8%
• B) 7.4%
• C) 8.7%
• D) 11.6%
• E) 13.2%

---

Definitions:

Preferred Stockholders

Investors who own shares of preferred stock, with claim to dividends and assets in the event of liquidation prior to common stockholders, often without voting rights.

Expected Rate

The anticipated return or yield on an investment or the forecasted growth rate of a variable such as inflation or economic growth.

Interest Rate

The cost of borrowing money or the return for investing money, typically expressed as a percentage of the principal.

Inventory

Inventory encompasses all the goods and materials a business holds for the purpose of resale, production, or utilization.