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You have been given this probability distribution for the holding-period return for KMP stock: Stock of the Economy Probability HPR Boom 0.30 18 % Normal growth 0.50 12 % Recession 0.20 – 5 % What is the expected holding-period return for KMP stock?

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Answer:  12.4%

Explanation:

The Expected return for a stock is the summation of all the returns given the probability of all market conditions.

Expected Return = ∑(Probability of return * return)

= (0.30 * 18%) + (0.50 * 12%) + (0.20 * 5%)

= 0.054 + 0.06 + 0.01

= 0.124

= 12.4%

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