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 Economy State of Economy Stock A Stock B Recession .22 .10 .17 Normal .52 .13 .12 Boom .26 .18 .29 Calculate the expected return for each stock. (Do not round intermediate calculations. Enter your answers as a percent rounded to 2 decimal places, e.g., 32.16.) Expected return Stock A % Stock B % Calculate the standard deviation for each stock. (Do not round intermediate calculations. Enter your answers as a percent rounded to 2 decimal places, e.g., 32.16.) Standard deviation Stock A % Stock B %

Explanation / Answer

Stock A Stock B Probability Expected return STOCK A Expected return OF Stock B deviation from mean STOCK A deviation from mean STOCK B square of deviation from mean STOCK A square of deviation from mean*probability Stock A square of deviation from mean STOCK B square of deviation from mean*probability Stock B 0.1 -0.17 0.22 2.2% -3.74% -11.44% -13.78% 1.308736% 0.002879219 1.898884% 0.004177545 0.13 0.12 0.52 6.8% 6.24% -6.88% -3.80% 0.473344% 0.002461389 0.144400% 0.00075088 0.18 0.29 0.26 4.7% 7.54% -8.96% -2.50% 0.802816% 0.002087322 0.062500% 0.0001625 Expected return 13.64% 10.04% Variance 0.743% 0.509% standard deviation-Total risk 8.62% 7.14% standard deviation-Total risk A 8.62% standard deviation-Total risk B 7.14%

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