You have estimated the following probability distributions of expected future re

Question

You have estimated the following probability distributions of expected future returns for Stocks X and Y: Stock X Stock Y Probability Return Probability Return 0.1 6 % 0.2 -5 % 0.1 12 0.2 6 0.3 14 0.2 11 0.4 20 0.3 18 0.1 40 0.1 30 What is the expected rate of return for Stock X? Stock Y? Round your answers to one decimal place. Stock X:   % Stock Y:   % What is the standard deviation of expected returns for Stock X? For Stock Y? Round your answers to two decimal places. Stock X:   % Stock Y:   % You have estimated the following probability distributions of expected future returns for Stocks X and Y:

Explanation / Answer

Stock X:

Expected Rate of Return = 0.10 * 6% + 0.10 * 12% + 0.30 * 14% + 0.40 * 20% + 0.10 * 40%
Expected Rate of Return = 18%

Variance = 0.10*(0.06-0.18)^2 + 0.10*(0.12-0.18)^2 + 0.30*(0.14-0.18)^2 + 0.40*(0.20-0.18)^2 + 0.10*(0.40-0.18)^2
Variance = 0.00728

Standard Deviation = (0.00728)^(1/2)
Standard Deviation = 0.0853 = 8.53%

Stock Y:

Expected Rate of Return = 0.20 * -5% + 0.20 * 6% + 0.20 * 11% + 0.30 * 18% + 0.10 * 30%
Expected Rate of Return = 10.80%

Variance = 0.20*(-0.05-0.108)^2 + 0.20*(0.06-0.108)^2 + 0.20*(0.11-0.108)^2 + 0.30*(0.18-0.108)^2 + 0.10*(0.30-0.108)^2
Variance = 0.01070

Standard Deviation = (0.01070)^(1/2)
Standard Deviation = 0.1034 = 10.34%

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