You Are Considering Purchasing Stock S

question 47

Multiple Choice

You are considering purchasing stock S. This stock has an expected return of 8% if the economy booms and 3% if the economy goes into a recessionary period. The overall expected rate of return on this stock will:

• A) be equal to one-half of 8% if there is a 50% chance of an economic boom.
• B) vary inversely with the growth of the economy.
• C) increase as the probability of a recession increases.
• D) be equal to 75% of 8% if there is a 75% chance of a boom economy.
• E) increase as the probability of a boom economy increases.

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Definitions:

Inflation

Inflation refers to the pace at which the average cost of products and services increases, leading to a decrease in buying power.

Zero-Coupon Bonds

Zero-coupon bonds are a type of bond that does not pay interest during its life and is instead sold at a discount to its face value, with the full face value being repaid at maturity.

Yield

Yield refers to the earnings generated and realized on an investment over a particular period, expressed as a percentage based on the investment's cost, current market value, or face value.

Face Value

The original value of a financial instrument as stated on the instrument itself, such as the principal value of a bond or the value printed on a stock certificate.