Question
After some study of the economy, your forecast for next year is that a boom economy has a 30% chance of occurring, a neutral economy
After some study of the economy, your forecast for next year is that a boom economy has a 30% chance of occurring, a neutral economy 50%, and a bust economy a 20% chance of occurring. You also estimate that a certain stock would have a return of 32% in a boom economy next year, 22% in a neutral economy , and -13% in a bust economy. The risk-free rate is 4.4%. What is the expected risk premium for this stock next year? (Answer to the nearest tenth of a percent, but do not use a percent sign).
| Probability | Return |
|
|
|
Boom Economy | 30% | 32% |
Neutral Economy | 50% | 22% |
Bust Economy | 20% | -13% |
Risk-Free Rate = 4.4%
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