Question

You are considering adding a stock to your portfolio that has an equal chance of earning four possible stock returns (all four have the same probability). The four possible returns are -10%, 5%, 20%, and 35%. What is the expected return and standard deviation for this stock?

Answer 1

Ans Expected Return= 12.50%

Standard Deviation = 16.77

	Probability (P)	RETURN (Y)	(P * Y )	P * (Y -Average Return of Y)^2
	25%	-10	-2.50	126.56
	25%	5	1.25	14.06
	25%	20	5.00	14.06
	25%	35	8.75	126.56
		TOTAL	12.50	281.25
Expected Return =		(P * Y)
		12.50%
VARIANCE =		P * (Y -Average Return of Y)^2
		281.2500
Standard Deviation =		Square root of (P * (Y -Average Return of Y)^2)
		Square root of 281.25
		16.77