Assume you think a boom and a recession are equally likely to happen, a 50-50...
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Accounting
Assume you think a boom and a recession are equally likely to happen, a 50-50 chance of either.
State of economy
Probability of state of economy
Security returns if state occurs
Security L
Security U
Recession
0.50
-20%
30%
Boom
0.50
70%
10%
Notice that security U earns 30% if there is a recession and 10% if there is a boom. Based on the above information, what is expected return on security U?
Select one:
a. 10%
b. 20%
c. 25%
d. 45%
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