KNF stock is quite cyclical. In a boom economy, the stock is expected to return 34 percent in comparison to 13 percent in a normal economy and a negative 22 percent in a recessionary period. The probability of a recession is 15 percent while the chance of a boom is 4 percent. What is the standard deviation of the returns this stock?
Ans 13.49%
Stock | PROBABILITY | RETURN (Y) | Return* Probability | P * (Y -Average Return of Y)^2 |
BOOM | 4.00% | 34.00 | 1.36 | 25.83 |
NORMAL | 81.00% | 13.00 | 10.53 | 15.75 |
RECESSION | 15.00% | -22.00 | -3.30 | 140.36 |
TOTAL | 25.00 | 8.59 | 181.94 | |
Expected Return = | Return * Probability | |||
8.59% | ||||
VARIANCE = | P * (Y -Average Return of Y)^2 | |||
181.9419 | ||||
Standard Deviation = | Square root of (P * (Y -Average Return of Y)^2) | |||
Square root of 181.94 | ||||
13.49 |
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