A Stock Is Expected to Return 13 Percent in an Economic

question 13

Multiple Choice

A stock is expected to return 13 percent in an economic boom, 10 percent in a normal economy, and 3 percent in a recessionary economy.Which one of the following will lower the overall expected rate of return on this stock?

• A)An increase in the rate of return in a recessionary economy
• B)An increase in the probability of an economic boom
• C)A decrease in the probability of a recession occurring
• D)A decrease in the probability of an economic boom
• E)An increase in the rate of return for a normal economy

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Definitions:

Expected Utility

Expected utility theory represents how rational individuals with preferences choose among risky alternatives to maximize their satisfaction or utility.

Toll Road

A public or private roadway for which a fee is assessed for passage, commonly used to fund road maintenance or construction projects.

Fine

A monetary penalty imposed by a government or legal authority as punishment for breaking a law or regulation.

Risk-Averse

A preference for guaranteed outcomes over gambles, even if the gamble might have a higher expected return due to the dislike of uncertainty.