3-7 Calculating Returns and Standard Deviations [LO1] Based on the following inf

Question

3-7 Calculating Returns and Standard Deviations [LO1]

Based on the following information, the expected return and standard deviation for Stock A arepercent andpercent, respectively. The expected return and standard deviation for Stock B arepercent andpercent, respectively.(Do not include the percent signs (%). Round your answers to 2 decimal places. (e.g., 32.16))

Based on the following information, the expected return and standard deviation for Stock A arepercent andpercent, respectively. The expected return and standard deviation for Stock B arepercent andpercent, respectively.(Do not include the percent signs (%). Round your answers to 2 decimal places. (e.g., 32.16))

Explanation / Answer

Stock A:

Expected Return = E(X) = .15(.05) + .65(.08) + .20(.13) = .0855

Recall that V(X) = E(X2) - [E(X)]2

E(X2) = .15(.05^2) + .65(.08^2) + .20(.13^2) = .007915

V(X) = .007915 - (.0855^2) = .00060475

Standard deviation = sqrt(V(X)) = sqrt(.00060475) = .0246

Stock B:

Expected Return = E(X) = .15(-.17) + .65(.12) + .20(.29) = .1105

E(X2) = .15(-.17^2) + .65(.12^2) + .20(.29^2) = .030515

V(X) = .030515 - (.1105^2) = .01830475

Standard deviation = sqrt(V(X)) = sqrt(.01830475) = .1353

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