Consider the following information: Calculate the expected return for Stock A. (

Question

Consider the following information:

Calculate the expected return for Stock A. (Do not round your intermediate calculations.)

9.57%

7.69%

9.2%

9.66%

7.62%

(b) Calculate the expected return for Stock B. (Do not round your intermediate calculations.)

18.72%

17.1%

18%

18.9%

8%

(c) Calculate the standard deviation for Stock A. (Do not round your intermediate calculations.)

2.27%

2.16%

1.61%

2.39%

2.36%

(d) Calculate the standard deviation for Stock B. (Do not round your intermediate calculations.)

15.84%

16.64%

11.2%

15.05%

16.48%

Rate of Return if State Occurs      State of Economy Probability of State of Economy Stock A Stock B    Recession 0.10 0.03 -0.23    Normal 0.50 0.09 0.15    Boom 0.40 0.11 0.32

Explanation / Answer

expected return for stock A = (0.10*0.03) + (0.50*0.09) + (0.40*0.11) = 0.092 or 9.2%

expected return for stock B = (0.10*-0.23) + (0.50*0.15) + (0.40*0.32) = 0.18 or 18%

standard deviation for stock A = sqrt((0.03-0.092)^2*0.10 + (0.09-0.092)^2*0.50 + (0.11-0.092)^2*0.4) = 2.27%

standard deviation of stock B = sqrt((-0.23-0.18)^2*0.10 + (0.15-0.18)^2*0.5 + (0.32-0.18)^2*0.4 = 15.84%

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