If a project's expected return is 10%, which represents a 16% return in a booming economy and a - 8% (8% loss) return in a stagnant economy, what is the probability of a stagnant economy?
A) 18.33%
B) 25.00%
C) 33.33%
D) 50.00%
EXPECTED RETURN = SUM(PROB X RETURN)
EXPECTED RETURN = PROB OF BOOM X RETURN + PROB OF STAGNANT X RETURN
suppose probability of boom = W, so probability of stagnant economy = 1 -W
EXPECTED RETURN = W X RETURN + (1-W) X RETURN
10% = W X (16%) + (1-W) X (-8%)
10% = W(16%) -8% + W(8%)
18% = W(24%)
W = 18/24 = 75%
1- W = 25%
ANSWER : PROB OF STAGNANT ECONOMY = 25%
ANSWER : B) 25.00% (Thumbs up please)
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