You Recently Purchased a Stock That Is Expected to Earn

question 41

Multiple Choice

You recently purchased a stock that is expected to earn 25% in a booming economy,9% in a normal economy and lose 8% in a recessionary economy. There is a 15% probability of a boom,a 65% chance of a normal economy,and a 10% chance of a recession. What is your expected rate of return on this stock?

• A) 7.65%
• B) 8.05%
• C) 8.67%
• D) 8.83%
• E) 9.00%

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Definitions:

Marginal Revenue

Marginal Revenue is the increase in revenue resulting from the sale of one additional unit of a product or service.

Marginal Cost

The financial impact of manufacturing an additional unit of a product or service.

Profit Maximization

A company's objective to make the most amount of profit possible with its current resources and market conditions.

Competitive Firm

A company that operates in a market with many buyers and sellers, where each has a negligible effect on the market price.