Use the following information on states of the economy and stock returns to calc
ID: 2717984 • Letter: U
Question
Use the following information on states of the economy and stock returns to calculate the expected return for Dingaling Telephone: (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places. Omit the "%" sign in your response.)
Use the following information on states of the economy and stock returns to calculate the expected return for Dingaling Telephone: (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places. Omit the "%" sign in your response.)
Explanation / Answer
Expected return of Dingaling Telephone = 5.60%
State of the economy
Probability
Security return
Recession
0.40
-5.50%
Normal
0.40
11.00%
Boom
0.20
17.00%
Expected return = Sum of [ probability * return associated with the probability]
Expected return = 0.40 * -5.50% + 0.40 * 11.00% + 0.20 * 17.00%
= -2.20% + 4.40% + 3.40%
= 5.60%
State of the economy
Probability
Security return
Recession
0.40
-5.50%
Normal
0.40
11.00%
Boom
0.20
17.00%