1. (2pts) Based on the following information calculate the expected return and s

Question

1. (2pts) Based on the following information calculate the expected return and standard deviation for the two stocks.

State of Economy       Probability of State occurring Stock Y Return Stock Z Return

Recession        0.15     -0.1      -0.02

Normal            0.70     0.15     0.1

Boom 0.15    0.28                 0.15

                                   

E (R) Stock Y (13.20%)                    

       Stock Y return =

                                   

E(R) Stock Z (8.95%)            

     Stock Z return =

Explanation / Answer

Answer:

Stock Y return =13.20%

E(R) Stock Z =8.95%

State of economy Probability Stock y Stock Z Expected return Y ER Z Recession 0.15 -0.1 -0.02 -0.015 -0.003 Normal 0.7 0.15 0.1 0.105 0.07 Boom 0.15 0.28 0.15 0.042 0.0225 0.132 0.0895

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