Question

Let’s consider the probabilities of state of economy are unequal for Stock L and Stock U. Recalculate variances and standard deviations of Stock L and Stock U.

Stock L
(1) State of Economy	(2) Probability of State of Economy	(3) Rate of Return if State Occurs	(4) Expected Return = sum of (2) × (3)	(5) Deviation from expected return = (3) – E(R)	(6) Squared Deviation from expected return = (5) × (5)	(7) Expected Variance = sum of (2) × (6)
Recession	.80	-20%
Boom	.20	70%
			E(R) =			σ2=
Standard deviation (σ) = variance =

Stock U
(1) State of Economy	(2) Probability of State of Economy	(3) Rate of Return if State Occurs	(4) Expected Return = sum of (2) × (3)	(5) Deviation from expected return = (3) – E(R)	(6) Squared Deviation from expected return = (5) × (5)	(7) Expected Variance = sum of (2) × (6)
Recession	.80	30%
Boom	.20	10%
			E(R) =			σ2=
Standard deviation (σ) = variance =

Answer 1