Consider the following information: Rate of Return If State Occurs State of Prob

Question

Consider the following information:

  

Rate of Return If State Occurs

  State of

Probability of

  Economy

State of Economy

Stock A

Stock B

  Recession

0.22

0.10

?

0.17

  Normal

0.52

0.13

0.12

  Boom

0.26

0.18

0.29

Calculate the expected return for the two stocks. (Round your answers to 2 decimal places. (e.g., 32.16))

  

Expected return

  Stock A

  Stock B

??%

Calculate the standard deviation for the two stocks. (Do not round intermediate calculations and round your final answers to 2 decimal places. (e.g., 32.16))

Standard deviation

  Stock A

  Stock B

??%

Rate of Return If State Occurs

  State of

Probability of

  Economy

State of Economy

Stock A

Stock B

  Recession

0.22

0.10

?

0.17

  Normal

0.52

0.13

0.12

  Boom

0.26

0.18

0.29

Calculate the expected return for the two stocks. (Round your answers to 2 decimal places. (e.g., 32.16))

Explanation / Answer

Hi,

Please find the answers as follows:

Expected Return Stock B = .22*17 + .52*12 + .26*29 = 17.52%

Variance = .22*(17 - 17.52)^2 + .52*(12 - 17.52)^2 + .26*(29 - 17.52)^2 = 50.17

Standard Deviation = (50.17)^1/2 = 7.08%

Thanks

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