Question

Consider the following information: Rate of Return If State Occurs State of Probability of Economy State of Economy Stock A Stock B Recession .17 .08 ? .12 Normal .58 .11 .17 Boom .25 .16 .34 Calculate the expected return for each stock. (Do not round intermediate calculations. Enter your answers as a percent rounded to 2 decimal places, e.g., 32.16.) Expected return Stock A % Stock B % Calculate the standard deviation for each stock. (Do not round intermediate calculations. Enter your answers as a percent rounded to 2 decimal places, e.g., 32.16.) Standard deviation Stock A % Stock B %

Answer 1

Stock A:

Expected Return = 0.17 * 0.08 + 0.58 * 0.11 + 0.25 * 0.16
Expected Return = 0.1174
Expected Return = 11.74%

Variance = 0.17 * (0.08 - 0.1174)^2 + 0.58 * (0.11 - 0.1174)^2 + 0.25 * (0.16 - 0.1174)^2
Variance = 0.000723

Standard Deviation = (0.000723)^(1/2)
Standard Deviation = 0.0269
Standard Deviation = 2.69%

Stock B:

Expected Return = 0.17 * (-0.12) + 0.58 * 0.17 + 0.25 * 0.34
Expected Return = 0.1632
Expected Return = 16.32%

Variance = 0.17 * (-0.12 - 0.1632)^2 + 0.58 * (0.17 - 0.1632)^2 + 0.25 * (0.34 - 0.1632)^2
Variance = 0.021476

Standard Deviation = (0.021476)^(1/2)
Standard Deviation = 0.1465
Standard Deviation = 14.65%