11.)Consider the following information: Rate of Return if State Occurs State of
ID: 2741955 • Letter: 1
Question
11.)Consider the following information: Rate of Return if State Occurs State of Economy Probability of State of Economy Stock A Stock B Recession 0.10 0.05 -0.19 Normal 0.60 0.07 0.14 Boom 0.30 0.13 0.34 Required: (a) Calculate the expected return for Stock A. (Do not round your intermediate calculations.) (b) Calculate the expected return for Stock B. (Do not round your intermediate calculations.) (c) Calculate the standard deviation for Stock A. (Do not round your intermediate calculations.) (d) Calculate the standard deviation for Stock B. (Do not round your intermediate calculations.)
Explanation / Answer
1.
Expected return for stock A = 0.1*0.05 + 0.6*0.07 + 0.3*0.13 = 0.086
2.
Expected return for stock B = 0.1*-0.19 + 0.6*0.14 + 0.3*0.34 = 0.167
3. Standard deviation for stock A = sqrt of (0.086-0.05)2 + (0.086-0.07)2 + (0.086-0.13)2
Std dev for stock A = 0.1034
4. Standard deviation for stock B = sqrt of (0.167-0.19)2 + (0.167-0.14)2 + (0.167-0.34)2
Std dev for stock B = 0.2138
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