Question

Consider the following information:

   

		Rate of Return if State Occurs
State of Economy	Probability of State of Economy	Stock A	Stock B
Recession	0.10	0.04	-0.20
Normal	0.50	0.07	0.12
Boom	0.40	0.15	0.31

   

Required:

(a)	Calculate the expected return for Stock A. (Do not round your intermediate calculations.)
	(Click to select)9.90%8.19%11.64%10.37%9.05%

   

(b)	Calculate the expected return for Stock B. (Do not round your intermediate calculations.)
	(Click to select)16.40%7.67%18.22%15.58%17.06%

   

(c)	Calculate the standard deviation for Stock A. (Do not round your intermediate calculations.)
	(Click to select)4.25%3.01%4.47%4.04%4.42%

   

(d)	Calculate the standard deviation for Stock B. (Do not round your intermediate calculations.)
	(Click to select)15.08%10.66%16.84%14.33%15.68%

Answer 1

a ) Option , 9.9%

Expected return for Stock A = 9.9% [ (0.1*0.04)+ (0.5*0.07)+(0.4*0.15) = 0.099 or 9.9%]

b) Option , 16.40%

Expected return for Stock A = 16.4% [ (0.1*-0.2)+ (0.5*0.12)+(0.4*0.31)= 0.164or 16.4%]

c) Option , 4.25%

Condition	Probability	Return	(Expected return - Return)^2	[ a*b]
	(a)		(b)
Recession	0.10	0.04	0.003481	0.000348
Normal	0.50	0.07	0.000841	0.000421
Boom	0.40	0.15	0.002601	0.001040
Variance				0.001809
Standard deviation (variance^1/2)				0.0425

d) Option 15.08%

Condition	Probability	Return	(Expected return - Return)^2	[ a*b]
	(a)		(b)
Strong	0.10	-0.20	0.132496	0.013250
Normal	0.50	0.12	0.001936	0.000968
Weak	0.40	0.31	0.021316	0.008526
Variance				0.022744
Standard deviation (variance^1/2)				0.1508