Question

Consider the following information: Rate of Return if State Occurs State of Economy Probability of State of Economy Stock A Stock B Recession 0.20 0.02 -0.17 Normal 0.60 0.08 0.12 Boom 0.20 0.16 0.35 Required: Given that the expected return for Stock A is 8.400%, calculate the standard deviation for Stock A. (Do not round your intermediate calculations.)

Answer 1

ANS 4.45

State	Probability (P)	STOCK A (X)	(P * X )	P * (X -Average Return of X)^2
Economic Boom	20%	2	0.4	8.1920
Economic Growth	60%	8	4.8	0.0960
Economic Decline	20%	16	3.2	11.5520
Total		TOTAL	8.4	19.8400
Average Return =		(P * X)
		8.40%
VARIANCE =		P * (X -Average Return of X)^2
		19.8400
Standard Deviation =		Square root of (P * (X -Average Return of X)^2)
		Square root of 19.84
		4.45421