Reference no: EM132639939

You are considering purchasing a stock. In a growing economy, the potential return is 20 percent, but if the economy stagnates, the potential return is only 7 percent. In the case of a recession, you could sustain a loss since the anticipated return is 8 percent. The probability of economic growth is 60 percent, while the probability of stagnation and recession are 30 percent and 10 percent respectively.

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

Required:

Question i. What is your return expectation on this investment?

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

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

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