Consider the following information: Calculate the expected return for the two st

Question

Consider the following information:

Calculate the expected return for the two stocks.

Calculate the standard deviation for the two stocks.

Rate of Return if State Occurs State of Probability of State Economy of Economy Stock A Stock B   Recession .24               .055          –.34            Normal .64               .135          .24            Boom .12               .230          .47          Requirement 1:

Calculate the expected return for the two stocks.

Expected return   E(RA) %   E(RB) % Requirement 2:

Calculate the standard deviation for the two stocks.

Standard deviation   A %   B %

Explanation / Answer

Consider the following information:

Requirement 1= Expected Return of=

Stock A= (0.24*0.055) + (0.64*0.135) + (0.12*0.230) = 12.72%

Stock B=(0.24*-0.34) + (0.64*0.24) + (0.12*0.47) = 12.84%

Requirement 2=The Standard Deviation for the two Stocks:

Stock A=

Standard Deviation = Square Root (0.018738- (0.1272)2 )

   = Square Root (0.018738-0.01617984) = Square Root (0.00255816)

= 0.0505 = 5.05 %

Stock B=

Standard Deviation = Square Root (0.091116- (0.1284)2 )

   = Square Root (0.091116-0.01648656) = Square Root (0.07462944)

= 0.27318 = 27.32 %

Rate of Return if State Occurs State of Probability of State Economy of Economy Stock A Stock B   Recession .24               .055          –.34            Normal .64               .135          .24            Boom .12               .230          .47         

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