A Stock Is Expected to Return 11% in a Normal

question 97

Multiple Choice

A stock is expected to return 11% in a normal economy, 19% if the economy booms, and lose 8% if the economy moves into a recessionary period. The economists predict a 65% chance of a normal economy, a 25% chance of a boom, and a 10% chance of a recession. What is the expected return on the stock?

• A) 11.98%
• B) 12.06%
• C) 11.10%
• D)11.23%

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Definitions:

Financial Errors

Mistakes in the accounting records that can distort the financial statements and mislead users.

Retained Earnings

The fraction of net earnings that is not allotted for dividends, but is retained by the company to reinvest in the core business activities or to pay off debts.

Annual Revenues

The total amount of money received by a company from its activities, such as sales of products or services, before any expenses are subtracted, within a fiscal year.

Expenses

The outflow of money to pay for goods, services, or assets, or the costs incurred in the operation of a business.