Question

The market and Stock J have the following probability distributions:

Probability	rM	rJ
0.3	14%	18%
0.4	9	7
0.3	19	12

1. Calculate the expected rate of return for the market. Round your answer to two decimal places.
   %
   
   Calculate the expected rate of return for Stock J. Round your answer to two decimal places.
   %
2. Calculate the standard deviation for the market. Do not round intermediate calculations. Round your answer to two decimal places.
   %
   
   Calculate the standard deviation for Stock J. Do not round intermediate calculations. Round your answer to two decimal places.
   %

Answer 1

Expected return of market

Expected return of Security J

Now calculating standard deviation of market return

Prob	RM	RM - RM'	(RM - RM' )2×Prob
0.3	14	14 - 13.5 = 0.5	0.25×0.3= 0.075
0.4	9	9 - 13.5 = - 4.5	20.25×0.4 = 8.1
0.3	19	19 - 13.5 = 5.5	30.25×0.3 = 9.075
	RM'= 13.5%	Variance,	17.25

Standard deviation of market,

Standard deviation of security J

Prob	RJ	RJ - RJ'	(RJ - RJ')2 × Prob
0.3	18	18-11.8 = 6.2	6.22 × 0.3 = 11.532
0.4	7	7-11.8= - 4.8	(-4.8)2 × 0.4 = 9.216
0.3	12	12 - 11.8 = 0.2	0.22 × 0.3 = 0.012
RJ'	11.8%	Variance,	20.76

Standard deviation of J

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