Question

Use the following information on states of the economy and stock returns to calculate the standard deviation of returns. (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places.)

State of Economy	Probability of State of Economy		Security Return if State Occurs
Recession	0.35		−10.00	%
Normal	0.50		7.00
Boom	0.15		17.00

Answer 1

Ans 9.82%

State of Economy	Probability (P)	RETURN (Y)	(P * Y )	P * (Y -Average Return of Y)^2
Recession	35%	-10	-3.50	55.13
Normal	50%	7	3.50	9.90
Boom	15%	17	2.55	31.32
		TOTAL	2.55	96.35
Expected Return =		(P * Y)
		2.55%
VARIANCE =		P * (Y -Average Return of Y)^2
		96.3475
Standard Deviation =		Square root of (P * (Y -Average Return of Y)^2)
		Square root of 96.35
		9.82