Calculate the expected return on stock: State of the economy/Probability of the state/ Percentage returns on stock: Economic recession/25%/-8.5 Boom/12%/15.6% Steady economic growth/63%/3.4% Solution Expected return on stock = (.25 * -8.5) +(.12 * 15.6 ) +(.63 *3.4) = - 2.125+ 1.872+ 2.142 = 1.889 %.

1. Calculate the expected return on stock:
State of the economy/Probability of the state/ Percentage returns on stock:
Economic recession/25%/-8.5
Boom/12%/15.6%
Steady economic growth/63%/3.4%
Solution
Expected return on stock = (.25 * -8.5) +(.12 * 15.6 ) +(.63 *3.4)
= - 2.125+ 1.872+ 2.142
= 1.889 %