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Use the following information on states of the economy and stock returns to calculate the expected...

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Finance

Use the following information on states of the economy and stockreturns to calculate the expected return for Dingaling Telephone:(Do not round intermediate calculations. Enter your answeras a percent rounded to 2 decimal places.)

  State of   EconomyProbability of
State of Economy		Security Return
If State Occurs
  Recession0.4-11%
  Normal0.216
  Boom?23

Answer & Explanation Solved by verified expert
3.8 Ratings (709 Votes)

Probability of boom economy= 1 – (0.4 + 0.2)

                                                         = 1 – 0.6

                                                         = 0.4

Expected return= 0.4*-11% + 0.2*16% + 0.4*23%

                               = -4.40% + 3.20% + 9.20%

                               = 8%.

In case of any query, kindly comment on the solution.
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