1. Consider an economy with four possible economic states: Boom, Normal, Slow Growth, and Recession which have a 0.2, 0.3, 0.4, and 0.1 probability of occurring, respectively. You are considering a stock which is expected to return 12%, 9%, 4%, and 2%, respectively, in each of those states. What is the expected return on the stock?
The answer to the above is 6.9%. I need the next question answered.
2. What is the standard deviation of the above stock's return? (Assume that the expected return is 8%.)
|Probabilty||Return||P*Return||(R -mean 8%)||(R -mean)^2||P*(R-M)^2|
|Mean % =||Sum of( P*return)|
|Standard deviation % =||squarroot of(Sum of (P* (R-Mean)^2))|
|SQRT of ( 13.5)|
Note : Here in second part of the question specifically says to take the expected return as 8% hence in table R-8% has been take actually it has to be take as R- Mean that is 6.9 (calculated value) . i think students understood the concept here.
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