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26. After some study of the economy, your forecast for next year is that a...

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Finance

26. 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 34% in a boom economy next year, 21% in a neutral economy , and -12% in a bust economy. The risk-free rate is 4.8%. 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%

34%

Neutral Economy

50%

21%

Bust Economy

20%

-12%

Risk-Free Rate = 4.8%

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