Question

The following data represent the probability distribution of the holding period returns for an investment in Lazy Rapids Kayaks (LARK) stock.

State of the Economy	Scenario #(s)	Probability, p(s)	HPR
Boom	1	0.340	33.20%
Normal growth	2	0.420	8.40%
Recession	3	0.24	-19.20%

a. What is the expected return on LARK? (Round your answer to 2 decimal places.)

Expected return             %

b. What is the standard deviation of the returns on LARK? (Round your answer to 2 decimal places.)

Standard deviation            %

Answer 1

a.Expected return=Respective return*Respective probability

=(0.34*33.2)+(0.42*8.4)+(0.24*-19.2)

=10.21%(Approx).

b.

probability	Return	probability*(Return-Expected return)^2
0.34	33.2	0.34*(33.2-10.208)^2=179.7349018
0.42	8.4	0.42*(8.4-10.208)^2=1.37292288
0.24	-19.2	0.24*(-19.2-10.208)^2=207.5593114
		Total=388.6671361%

Standard deviation=[Total probability*(Return-Expected return)^2/Total probability]^(1/2)

=(388.6671361)^(1/2)

which is equal to

=19.71%(Approx).

answered by: anonymous