Question

# Consider the following information: Rate of Return If State Occurs State of Economy Probability of State...

Consider the following information:

 Rate of Return If State Occurs State of Economy Probability of State of Economy Stock A Stock B Recession .18 .07 −.18 Normal .55 .10 .11 Boom .27 .15 .28

Calculate the expected return for the two stocks. (Do not round intermediate calculations. Enter your answers as a percent rounded to 2 decimal places, e.g., 32.16.)

 Expected return Stock A % Stock B %

Calculate the standard deviation for the two stocks. (Do not round intermediate calculations. Enter your answers as a percent rounded to 2 decimal places, e.g., 32.16.)

 Standard deviation Stock A % Stock B %

Stock A:

Expected Return = 0.18 * 0.07 + 0.55 * 0.10 + 0.27 * 0.15
Expected Return = 0.1081 or 10.81%

Variance = 0.18 * (0.07 - 0.1081)^2 + 0.55 * (0.10 - 0.1081)^2 + 0.27 * (0.15 - 0.1081)^2
Variance = 0.00077139

Standard Deviation = (0.00077139)^(1/2)
Standard Deviation = 0.0278 or 2.78%

Stock B:

Expected Return = 0.18 * (-0.18) + 0.55 * 0.11 + 0.27 * 0.28
Expected Return = 0.1037 or 10.37%

Variance = 0.18 * (-0.18 - 0.1037)^2 + 0.55 * (0.11 - 0.1037)^2 + 0.27 * (0.28 - 0.1037)^2
Variance = 0.02290131

Standard Deviation = (0.02290131)^(1/2)
Standard Deviation = 0.1513 or 15.13%

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