Question

There is a 43.60% probability of a below average economy and a 56.40% probability of an average economy. If there is a below average economy stocks A and B will have returns of -7.30% and 4.70%, respectively. If there is an average economy stocks A and B will have returns of 10.20% and 2.50%, respectively.

Compute the:
        a) Expected Return for Stock A

        b) Expected Return for Stock B

        c) Standard Deviation for Stock A  

        d) Standard Deviation for Stock B  

Answer 1

Solution :

a) Expected Return for Stock A = 2.5700 %

= 2.57 % ( when rounded off to two decimal places )

b) Expected Return for Stock B = 3.4592 %

= 3.46 % ( when rounded off to two decimal places )

c) Standard Deviation for Stock A = 8.6780 %

​​​​​​​= 8.68 % ( when rounded off to two decimal places )

d) Standard Deviation for Stock B = 1.0910 %

​​​​​​​= 1.09 % ( when rounded off to two decimal places )

Please find the attached screenshot of the excel sheet containing the detailed calculation for the solution.