Question

You recently purchased a stock that is expected to earn 19 percent in a booming economy, 8 percent in a normal economy, and lose 28 percent in a recessionary economy. There is a 20 percent probability of a boom and a 70 percent chance of a normal economy. What is standard deviation on this stock? show the answer in detail.

Answer 1

	A	B	C = A x B
Economic State	Probability(P)	Return	PxReturn	P(Return - Mean Ret)^2
Booming	0.2	19%	0.038	0.003075	0.2(0.19-0.066)^2
Normal	0.7	8%	0.056	0.000137	0.7(0.08-0.066)^2
Recessionary	0.1	-28%	-0.028	0.011972	0.1(-0.28-0.066)^2
		Mean Return	0.066
			Variance(Sum)	0.015184
			Standard deviation(SQRT of Variance)	0.123223	(0.015184)^(1/2)
Mean	6.60%
Standard Deviation	12.32%