Question

Question 2 (1 point)

Calculate the expected standard deviation on stock:

State of the economy	Probability of the states	Percentage returns
Economic recession	21%	2%
Steady economic growth	30%	9%
Boom	Please calculate it	11%

Round the answers to two decimal places in percentage form

Answer 1

First we find expected rate of return

Convert all probabilities to point form by dividing it by 100.

Probability of boom=100-30-21=49%=0.49

Expected rate of return=sum of (percentage returns*probability of states)=2%*0.21+9%*.3+11%*.49=8.51%

Now let's find variance, since standard deviation is square root of variance

Variance=sum of (((rate of return-expected return)^2)*corresponding probability)

=((2-8.51)^2)*0.21 + ((9-8.51)^2)*.3 + ((11-8.51)^2)*.49

=8.899 + 0.07203 + 3.038

=12.009%

Therefore standard deviation=√12.009=3.46%