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. (Do not round intermediate calculations. Enter your answers as a percentage rounded to 2 decimal places (e.g., 32.16).)

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).)

State of Economy Probability of State of Economy Rate of Return if State Occurs Stock A Stock B Recession .21 .040 -.31 Normal .61 .120 .21 Boom .18 .200 .44

Explanation / Answer

Stock A Probability Return Product Return Squared Product Deviation Deviation Recession 0.21 0.04 0.0084 -0.0776 0.00602 0.00126 Normal 0.61 0.12 0.0732 0.0024 0.00001 0.00000 Boom 0.18 0.2 0.036 0.0824 0.00679 0.00122 Expected Return 0.1176 Variance 0.00249 Expected Return: 11.76% Standard Deviation:4.90% (Square root of Variance) Stock B Probability Return Product Return Squared Product Deviation Deviation Recession 0.21 -0.31 -0.0651 -0.4522 0.20448 0.04294 Normal 0.61 0.21 0.1281 0.0678 0.00460 0.00280 Boom 0.18 0.44 0.0792 0.2978 0.08868 0.01596 Expected Return 0.1422 Variance 0.06171 Expected Return: 14.22% Standard Deviation:24.80% (Square root of Variance)

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