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 State Economy of Economy Stock A Stock B Recession .24 .055 –.44 Normal .64 .135 .34 Boom .12 .330 .57 Requirement 1: Calculate the expected return for the two stocks. (Do not round intermediate calculations. Enter your answers as a percentage rounded to 2 decimal places (e.g., 32.16).) Expected return E(RA) % E(RB) % Requirement 2: Calculate the standard deviation for the two stocks. (Do not round intermediate calculations. Enter your answers as a percentage rounded to 2 decimal places (e.g., 32.16).) Standard deviation A % B %

Explanation / Answer

1) Expected return A = Probability *return

                                        = (.24 *.055 ) +(.64 * .135) +(.12* .330)

                                        = .0132+ .0864 + .0396

                                        = .1392 or 13.92 %

Expected return of B = (.24 * -.44 ) +(.64 *.34) +(.12*.57)

                                     = - .1056 + .2176 + .0684

                                     = .1804 or 18.04% .

2)Standard deviation of A

standard deviation =square root of .00608

                                       = .0780 or 7.80%

Standard deviation of B

Standard deviation = square root of .12689

                                     = .3562 or 35.62%

Probability Return   (X) A= (X- .1392) (A^2) * P .24 .055 -.0842 .00170 .64 .135 - .0042 .00001 .12 .330 .1908 .00437 Variance .00608

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