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	0.05	-0.22
Normal	0.50	0.09	0.16
Boom	0.30	0.15	0.33

(c)	Calculate the standard deviation for Stock A. (Do not round your intermediate calculations.)
	A) 3.61% B) 2.55% C) 3.79% D) 3.43% E) 3.75%

   

(d)	Calculate the standard deviation for Stock B. (Do not round your intermediate calculations.)
	A) 19.22% B) 13.59% C) 21.18% D) 18.26% E) 19.98%

  

Answer 1

Stock A
Scenario	Probability	Return%	=rate of return% * probability	Actual return -expected return(A)%	(A)^2* probability
Recession	0.2	5	1	-5	0.0005
Normal	0.5	9	4.5	-1	0.00005
Boom	0.3	15	4.5	5	0.00075
	Expected return %=	sum of weighted return =	10	Sum=Variance Stock A=	0.0013
			c. Standard deviation of Stock A%	=(Variance)^(1/2)	3.61
Stock B
Scenario	Probability	Return%	=rate of return% * probability	Actual return -expected return(A)%	(B)^2* probability
Recession	0.2	-22	-4.4	-35.5	0.025205
Normal	0.5	16	8	2.5	0.0003125
Boom	0.3	33	9.9	19.5	0.0114075
	Expected return %=	sum of weighted return =	13.5	Sum=Variance Stock B=	0.03693
			d. Standard deviation of Stock B%	=(Variance)^(1/2)	19.22