Question

A.

Use the following information on states of the economy and stock returns to calculate the expected return for Dingaling Telephone: (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places. Omit the "%" sign in your response.)

State of   Economy	Probability of State of Economy		Security Return If State Occurs
Recession	.40		–5.50	%
Normal	.40		11.00
Boom	.20		17.00

B.

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. Omit the "%" sign in your response.)

State of   Economy	Probability of State of Economy		Security Return If State Occurs
Recession	.30		–6.5	%
Normal	.55		9
Boom	.15		19

Answer 1

1)	Expected Return of a stock is the mean of returns for the forcasted period.
	Mean =	Sum of Probability x returns
State	Probability	Return if state occurs(x)	Prob. X Return
	(p)	A	A
Recession	0.40	-5.5	-2.20
Normal	0.40	11.0	4.40
Boom	0.20	17.0	3.40
			5.60
Expected return =	5.60%
2)
State	Probability	Return if state occurs(x)	Prob. X Return	(x - Mean)	(x - Mean)^2	P x (x - mean)^2
	(p)	A	A	A	A	A
Recession	0.30	-6.5	-1.95	-12.4	152.52	45.76
Normal	0.55	9.0	4.95	3.2	9.92	5.46
Boom	0.15	19.0	2.85	13.2	172.92	25.94
			5.85			77.15
Standard deviation of stock =	Sq. Root of variance
Variance =	Sum of (P x (x - Mean)^2)
Standard deviation of stock =	sq. root (77.15)
	8.78