Question

Consider the following information:

  

		Rate of Return if State Occurs
State of Economy	Probability of State of Economy	Stock A	Stock B
Recession	0.20	0.06	-0.23
Normal	0.60	0.08	0.13
Boom	0.20	0.14	0.34

  

Required:

(a)	Calculate the expected return for Stock A. (Do not round your intermediate calculations.)
	(Click to select)8.80%8.85%10.49%11.03%7.90%

  

(b)	Calculate the expected return for Stock B. (Do not round your intermediate calculations.)
	(Click to select)10.00%8.00%11.50%9.50%10.40%

  

(c)	Calculate the standard deviation for Stock A. (Do not round your intermediate calculations.)
	(Click to select)2.71%1.92%2.85%2.58%2.82%

  

(d)	Calculate the standard deviation for Stock B. (Do not round your intermediate calculations.)
	(Click to select)18.40%13.01%20.32%17.48%19.13%

Answer 1

a. Answer:8.80 %

Expected rate of return on Stock A = 0.20 x 6 % + 0.60 x 8 % + 0.20 x 14 % = 1.2 % + 4.8 % + 2.8 % = 8.80 %

b. Answer: 10 %

Expected rate of return on Stock B = 0.20 x - 23 % + 0.60 x 13 % + 0.20 x 34 % = - 4.60 % + 7.80 % + 6.80 % = 10 %

c. Answer:2.71 %

Stock A
	pi	Ri	Ri - ER	( Ri - ER ) 2	pi ( Ri - ER )
Recession	0.20	6	- 2.80	7.84	1.568
Normal	0.60	8	- 0.80	0.64	0.384
Boom	0.20	14	5.20	27.04	5.408
					7.36

Standard deviation of Stock A = 7.36 ^1/2 = 2.71

d. Answer:18.40 %

Stock B
	pi	Ri	Ri - ER	(Ri - ER )2	pi( Ri - ER )2
Recession	0.20	- 23	- 33	1,089	217.80
Normal	0.60	13	3	9	5.40
Boom	0.20	34	24	576	115.20
					338.40

Standard deviation of Stock B : 338.40^1/2 = 18.40 %