Question: An analyst believes GM stock could provide several different rates of return depending on differe…

02 May Question: An analyst believes GM stock could provide several different rates of return depending on differe…

Posted at 09:35h in 2Past Paper by Exams

An analyst believes GM stock could provide several different rates of return depending on different possible economic conditions. In a strong economic environment with high corporate profits, the investor expects the rate of return on GM stocks during the next year to reach as high as 10%. In contrast, if there is a slight economic decline, the analyst expects the rate of return on GM common stocks during the next year to be 5%, and if the economy enters a recession, the analyst expects the return to be-10%. Finally, with no major change in the economy, the rate of return during the next year would probably approach the long-run average of 7%. The analyst estimates probabilities for each of these economic scenarios based on past experience and the current outlook as follows: Economic Conditions Strong economy Declining economy Recession No major change Probability 10% 15% 10% 65% What are the expected return and the standard deviation of the GM stock over the next year?

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