Question

Problem 10-24 Expected Return and Risk (LG10-1) Following are four economic states, their likelihoods, and the potential returns:

Economic State Probability Return

Fast growth 0.22 66 %

Slow growth 0.55 26

Recession 0.18 −19

Depression 0.05 −53

Compute the expected return and standard deviation.

Answer 1

Return
Scenario	Probability	Return%	=rate of return% * probability	Actual return -expected return(A)%	(A)^2* probability
Fast growth	0.22	66	14.52	43.25	0.041152375
Slow growth	0.55	26	14.3	3.25	0.000580938
Recession	0.18	-19	-3.42	-41.75	0.031375125
Depression	0.05	-53	-2.65	-75.75	0.028690313
	Expected return %=	sum of weighted return =	22.75	Sum=Variance Return=	0.1018
			Standard deviation of Return%	=(Variance)^(1/2)	31.91