Actions For Q5: Must Post First To Calculate Expected Return

Actions For Q5 1must Post Firstcalculate The Expected Return On Stock

Calculate the expected return on the stock of Time Saver Inc. based on the given economic scenarios, probabilities, and returns. The states of the economy are economic recession, steady economic growth, and boom, with respective probabilities of 15%, 50%, and 35%. The returns are 7.6% during recession, 4.0% during steady growth, and -4.6% during the boom. Use these data points to compute the weighted average expected return for the stock, which reflects the anticipated profitability considering different economic conditions.

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The expected return on a stock provides investors with an estimate of the average return they can anticipate, considering the likelihood of various economic scenarios and their respective impacts on the stock's performance. Calculating this metric involves weighing possible returns by their associated probabilities and summing these to obtain a single, comprehensive figure that captures the average expected outcome.

For Time Saver Inc., the calculation begins by identifying the probabilities of each economic state and their corresponding returns. The states are economic recession, steady economic growth, and boom, with probabilities of 15%, 50%, and 35%, respectively. The returns are 7.6% in recession, 4.0% in a steady economy, and -4.6% during a boom.

The expected return (ER) is computed as follows:

ER = (Probability of recession × Return during recession) + (Probability of steady growth × Return during steady growth) + (Probability of boom × Return during boom)

ER = (0.15 × 0.076) + (0.50 × 0.040) + (0.35 × -0.046)

ER = 0.0114 + 0.020 + (-0.0161)

ER = 0.0153 or 1.53%

Therefore, the expected return on the stock of Time Saver Inc. is approximately 1.53%.

This calculation indicates that, on average, investors can expect a return of about 1.53% considering the probabilities and outcomes of different economic states. Such a measure aids investors in decision-making by providing an expected performance benchmark, taking into account the inherent uncertainties in economic conditions.

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