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 |

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