Question

Expected Returns: Discrete Distribution The market and Stock J have the following probability distributions: Probability rM...

Expected Returns: Discrete Distribution

The market and Stock J have the following probability distributions:

 Probability rM rJ 0.3 15% 22% 0.4 9 4 0.3 19 13

Calculate the expected rate of return for the market. Round your answer to two decimal places.
%

Calculate the expected rate of return for Stock J. Round your answer to two decimal places.
%

Calculate the standard deviation for the market. Do not round intermediate calculations. Round your answer to two decimal places.
%

Calculate the standard deviation for Stock J. Do not round intermediate calculations. Round your answer to two decimal places.

%

For the market:

Expected return=Respective return*Respective probability

=(0.3*15)+(0.4*9)+(0.3*19)=13.8%

 probability Return probability*(Return-Expected return)^2 0.3 15 0.3*(15-13.8)^2=0.432 0.4 9 0.4*(9-13.8)^2=9.216 0.3 19 0.3*(19-13.8)^2=8.112 Total=17.76%

Standard deviation=[Total probability*(Return-Expected return)^2/Total Probability]^(1/2)

which is equal to

=4.21%(Approx)

For the Stock J:

Expected return=Respective return*Respective probability

=(0.3*22)+(0.4*4)+(0.3*13)=12.1%

 probability Return probability*(Return-Expected return)^2 0.3 22 0.3*(22-12.1)^2=29.403 0.4 4 0.4*(4-12.1)^2=26.244 0.3 13 0.3*(13-12.1)^2=0.243 Total=55.89%

Standard deviation=[Total probability*(Return-Expected return)^2/Total Probability]^(1/2)

which is equal to

=7.48%(Approx)