An Investor Owns a Security That Is Expected to Return

question 18

Multiple Choice

An investor owns a security that is expected to return 10 percent in a booming economy and 3 percent in a normal economy.The overall expected return on the security is 5.45 percent.Given there are only two states of the economy,what is the probability that the economy will boom?

• A) 28 percent
• B) 33 percent
• C) 35 percent
• D) 41 percent
• E) 45 percent

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Definitions:

Price Floor

A government or group-imposed price control that sets the lowest legal price a commodity can be sold at.

Government

The organization or system through which a community, state, or nation is governed and regulatory and administrative functions are conducted.

Binding Price Floor

A binding price floor is a government-imposed limit on how low a price can be charged for a product or service, set above the equilibrium price, leading to potential surpluses.

Surplus

The excess of supply over demand in a market, resulting in lower prices.