Question

Given the following information, what is the standard deviation of stock A if it has an expected return of .27% in a boom economy, an expected return of 18% in a good economy, and an expected return of 3% in a recession? The probabilities of boom, normal, recession are 0.2, 0.6, and 0.2, respectively.

Answer 1

Ans 7.73

State of Economy	Probability (P)	RETURN (Y)	(P * Y )	P * (Y -Average Return of Y)^2
Boom	20%	27	5.40	20.81
Normal	60%	18	10.80	0.86
Recession	20%	3	0.60	38.09
		TOTAL	16.80	59.76
Expected Return =		(P * Y)
		16.80%
VARIANCE =		P * (Y -Average Return of Y)^2
		59.7600
Standard Deviation =		Square root of (P * (Y -Average Return of Y)^2)
		Square root of 59.76
		7.73