P13-7 Calculating Returns and Standard Deviations [LO1] Consider the following i

Question

P13-7 Calculating Returns and Standard Deviations [LO1] Consider the following information Rate of Return if State Occurs State of Economy Recession Normal Boom Probability of State of Economy 0.10 0.60 0.30 Stock A 0.06 0.08 0.15 Stock B 0.20 0.14 0.33 Required (a) Calculate the expected return for Stock A. (Do not round your intermediate calculations.) 9.90% (b) Calculate the expected return for Stock B. (Do not round your intermediate calculations.) 16.30% (c) Calculate the standard deviation for Stock A. (Do not round your intermediate calculations.) (Click to select) v (d) Calculate the standard deviation for Stock B. (Do not round your intermediate calculations.) (Click to select) v

Explanation / Answer

a) Expected return for stock A = 0.1 * 0.06 + 0.6 * 0.08 + 0.3 * 0.15 = 9.9%

b) Expected return for Stock B = 0.1 * -0.20 + 0.6 * 0.14 + 0.3 * 0.33 = 16.3%

c)Variance of Stock A = 0.1 * ( 0.06 -9.9%)2 + 0.6 * ( 0.08 - 9.9%)2 + 0.3 * ( 0.15 - 9.9%)2 = 0.001149
Standard Deviation of Stock A = Variance^0.5 = (0.001149)^0.5 = 3.39%

Variance of Stock B =  0.1 * ( -0.20 -16.3%)2 + 0.6 * ( 0.6 - 16.3%)2 + 0.3 * ( 0.33 - 16.3%)2 = 0.021861

Standard Deviation of Stock B = Standard Deviation^0.5 = (0.021861)^0.5 = 14.79%

Related Questions

Navigate

• Browse (All)
• Browse P
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.