Question

A. Use the following information on states of the economy and stock returns to calculate the...

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

 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