You are considering purchasing a stock. In a growing economy, the potential return is 20percent, but if the economy stagnates, the potential return is only 7percent. In the case of a recession, you could sustain a loss since the anticipated return is

-8percent. The probability of economic growth is 60percent, while the probability of stagnation and recession are 30percent and 10percent respectively.

Assume the risk-free rate and the Security's risk premium were 7 percent and 8 percent, respectively.

Required:

i.What is your return expectation on this investment?

ii.What is the total expected volatility in the investment returns?

iii.Calculate the minimum rate of return you would require from the investment.

iv.Explain whether you should proceed and buy the stock.

[20 Marks]