Consider the following information: .37 Calculate the expected return for the tw

Question

Consider the following information:

.37

Calculate the expected return for the two stocks. (Do not round intermediate calculations. Enter your answers as a percent rounded to 2 decimal places. Omit the "%" sign in your response.)

Calculate the standard deviation for the two stocks. (Do not round your intermediate calculations. Enter your answers as a percent rounded to 2 decimal places. Omit the "%" sign in your response.)

Rate of Return If State Occurs State of Probability of Economy State of Economy Stock A Stock B   Recession .25 .03 –.11   Normal .30 .10 .17   Boom .45 .12

.37

a.

Calculate the expected return for the two stocks. (Do not round intermediate calculations. Enter your answers as a percent rounded to 2 decimal places. Omit the "%" sign in your response.)

        Expected return for A %   Expected return for B % b.

Calculate the standard deviation for the two stocks. (Do not round your intermediate calculations. Enter your answers as a percent rounded to 2 decimal places. Omit the "%" sign in your response.)

  Standard deviation for A %     Standard deviation for B %  

Explanation / Answer

a. Expected return for A = (3 x 25%) + (10 x 30%) + (12 x 45%) = 9.15%
Expected return for B = (-11 x 25%) + (17 x 30%) + (37 x 45%) = 19%

b. Variance of stock A = [(3 - 9.15)2 x 25%] + [(10 - 9.15)2 x 30%] + [(12 - 9.15)2 x 45%] = 13.3275
Standard Deviation of A = (13.3275)1/2 = 3.65%

Variance of Stock B = [(-11 - 19)2 x 25%] + [(17 - 19)2 x 30%] + [(37 - 19)2 x 45%] = 372
Standard Deviation of A = (13.3275)1/2 = 19.29%

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