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 0.16 0.07 0.11 Normal 0.57 0.10 0.18 Boom 0.27 0.15 0.35 Calculate the expected return for the two stocks. (Round your answers to 2 decimal places. (e.g., 32.16)) Expected return Stock A % Stock B % Calculate the standard deviation for the two stocks. (Do not round intermediate calculations and round your final answers to 2 decimal places. (e.g., 32.16)) Standard deviation Stock A % Stock B %

Explanation / Answer

If My understanding is correct, so on the basis of below table i will be calculating the nreturns:-

The expected return of an asset is the sum of each return times the probability of that return occuring. So, the expected return of each stock asset is:

E(Ra) = 0.16*(0.07)+.57*(0.1)+0.27*(0.15) = 0.0512 = 5.12%

E(rb) = 0.16*(-0.11)+0.57*(0.18)+0.27*(0.35) = 0.0672 = 6.72%

To calculate standard deviation , we first need to calculate varinace. to find the variance, we find the squared deviation from the expected returns.

Std devA = 0.16*(0.07-0.0512)^2+0.57(0.10-0.0512)^2+0.27*(0.15-.0512)^2= 0.012496 = 11.18%

Std dev b = 0.16*(-0.11-0.0672)^2+0.57*(0.18-0.0672)^2+0.27*(0.35-0.0672) = 35.23%

State Prob Stock A Stock b Recession 0.16 0.07 -0.11 Normal 0.57 0.1 0.18 Boom 0.27 0.15 0.35

Related Questions

Navigate

• Browse (All)
• Browse C
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.