Question

During a normal economy, an investment in common stock of D&F Oil provides 15 percent per...

During a normal economy, an investment in common stock of D&F Oil provides 15 percent per annum rate of return. During a recession, the rate of return is negative 12 percent and during a boom, the rate of return is 35 percent. The probability of a normal economy is 80 percent while the probability of a recession is 8 percent and the probability of a boom is 12 percent.

  1. What is the expected return for Millennial Lithium Inc.?
  1. What is the standard deviation of Millenial Lithium Inc’s expected return?
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Homework Answers

Answer #1

Calculation table for Expected Return & Standard Deviation of Millennial Lithium Inc.

Scenario Probability Return (R) R * Probability Deviation (D) D^2 D^2 * Probability
Normal Economy 0.8 15% 0.12 -0.0024 0.00000576 0.00000461
Recession 0.08 -12% -0.0096 -0.2724 0.07420176 0.00593614
Boom 0.12 35% 0.042 0.1976 0.03904576 0.00468549
Total 0.1524 Total 0.01062624

A) Calculation of Expected Return for Millennial Lithium Inc.


ER = 0.1524 or 15.24%

B) Calculation of Standard Deviation for Millennial Lithium Inc.


Where D (Deviation) = Return - ER

0.103084 or 10.31%

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