Question

Problem 6-6
Expected Return: Discrete Distribution

The market and Stock J have the following probability distributions:

Probability	rM	rJ
0.3	16%	18%
0.4	9	3
0.3	17	12

1. 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.
   %
   
2. Calculate the standard deviation for the market. Round your answer to two decimal places.
   %
   
   Calculate the standard deviation for Stock J. Round your answer to two decimal places.
   %

Answer 1

Market
Probabilty	Return	Probability* Return	Return- Expected Return[D]	Probability*D*D
0.3	0.16	0.048	0.025	0.0001875
0.4	0.09	0.036	-0.045	0.00081
0.3	0.17	0.051	0.035	0.0003675
	Expected Return = Sum of Probability*Return	0.135 = 13.5%	Variance =Sum of [D^2]	0.001365
			Standard Deviation =Variance^1/2	0.036945906 = 3.69%

J
Probabilty	Return	Probability* Return	Return- Expected Return[D]	Probability*D*D
0.3	0.18	0.054	0.078	0.0018252
0.4	0.03	0.012	-0.072	0.0020736
0.3	0.12	0.036	0.018	9.72E-05
	Expected Return = Sum of Probability*Return	0.102 = 10.2%	Variance =Sum of [D^2]	0.003996
			Standard Deviation =Variance^1/2	0.063213923 = 6.32%