Question

# Quantitative Problem: You are given the following probability distribution for CHC Enterprises: State of Economy Probability...

Quantitative Problem: You are given the following probability distribution for CHC Enterprises:

 State of Economy Probability Rate of return Strong 0.20 20 % Normal 0.50 10 Weak 0.30 -4

What is the stock’s STD DEV?

Calculation of Expected return:

 Particulars Probability (1) Return (2) Expected return (3) (1*2) Strong 0.2 20% 4% Normal 0.5 10% 5% Weak 0.3 -4% -1.2% Expected return 7.8%

Calculation of Standard deviation:

 Particulars Probability (1) Return-Expected return(2) Square of Return-Expected return (3) Variance (4) (1*3) Strong 0.2 20%-7.8%=12.2% or 0.122 (0.122)^2 = 0.0149 0.00298 Normal 0.5 10%-7.8%=2.2% or 0.022 (0.022)^2 = 0.0005 0.00025 Weak 0.3 -4%-7.8%=-11.8% or -0.118 (-0.118)^2=0.0139 0.00417 Variance 0.0074

Standard deviation = Square root of Variance

= Square root of 0.0074

= 0.086 or 8.6%

Standard deviation = 8.6%

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