You Recently Purchased a Stock That Is Expected to Earn

question 20

Multiple Choice

You recently purchased a stock that is expected to earn 12% in a booming economy,8% in a normal economy and lose 5% in a recessionary economy. There is a 15% probability of a boom,a 75% chance of a normal economy,and a 10% chance of a recession. What is your expected rate of return on this stock?

• A) 5.00%
• B) 6.45%
• C) 7.30%
• D) 7.65%
• E) 8.30%

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Definitions:

Equity

represents the value of the shares issued by a company, denoting the ownership interest held by shareholders in the corporation.

Call Option

A monetary agreement allowing the possessor the choice, yet not the compulsion, to acquire a stock, bond, commodity, or any other asset for a prearranged price within a set interval.

Out-Of-The-Money

A term used in options trading to describe an option that has no intrinsic value. For a call option, this is when the strike price is above the market price of the underlying asset; for a put option, it's the opposite.

Exercising Option

The act of utilizing the right to buy or sell an underlying asset at a predetermined price before the expiration date.