Question

A stock will provide a rate of return of either ?28% or 30%.

If both possibilities are equally likely, calculate the stock's expected return and standard deviation. (Do not round intermediate calculations. Enter your answers as a whole percent.)

Expected return% ___________

Standard deviation% ___________

Answer 1

A) Expected Return: Probability x(Scenario x) + Probability y(Scenario y)...

Both proablities are equally likely, therefore probablility for both scenarios is 50%(0.5)

Expected Return: 0.5(-28%) + 0.5(30%)

=-14% + 15%

=1%

B) Standard Deviation: Square root of the variance

Variance: (X₁-X_M)² + (X₂-X_M)²/n

Where X_M=Mean of the observations

n=no. of observations

Mean of the observations: (-28% + 30%)/2

=1%

Variance: {(-28-1)² + (30-1)²}/2

=841%

Standard deviation: 841

=29%