3 value: 6.00 points Consider the following information: Rate of Return if State

Question

3 value: 6.00 points Consider the following information: Rate of Return if State Occurs Probability of State of Economy 0.20 0.55 0.25 State of Economy Recession Normal Boom Stock A 0.010 0.090 0.140 Stock B 0.25 0.15 0.38 Requirement 1: Calculate the expected return for the two stocks. (Do not include the percent signs (%). Round your answers to 2 decimal places (e.g., 32.16).) Expected return E(RA) 8.65 % E(RB) 12.75 % Requirement 2. Calculate the standard deviation for the two stocks. (Do not include the percent signs (%). Round your answers to 2 decimal places (e.g., 32.16).) Standard deviation 9.46 % 223.58 %

Explanation / Answer

1) E(RA) = (0.20)*(0.010) + (0.55)*(0.090) + (0.25)*(0.140) = = 0.0865 = = 8.65% So the expected return on Stock A is 8.65%. E(RB) = (0.20)*(-0.25) + (0.55)*(0.15) + (0.25)*(0.38) = = 0.1275 = = 12.75% The expected return on Stock B is 12.75%. 2) VarA = (0.20)*(0.010 - 0.0865)^2 + (0.55)*(0.090 - 0.0865)^2 + + (0.25)*(0.140 - 0.0865)^2 = = 0.00189 STDA = sqrt(0.00189) = = 0.04351 = = 4.35% The standard deviation of returns of Stock A is 4.35%. VarB = (0.20)*(-0.25-0.1275)^2 + (0.55)*(0.15-0.1275)^2 + + (0.25)*(0.38-0.1275)^2 = = 0.00447 STDB = sqrt(0.00447) = = 0.2114 = = 21.14% The standard deviation of returns of Stock B is 21.14%.

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