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 | ||||||
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