Complete Problems 1, 2, and 3 from the Questions and Problems section of Chapter

Question

Complete Problems 1, 2, and 3 from the Questions and Problems section of Chapter 11 (shown below). Remember to complete all parts of the questions, and report the results of your analysis. Respond to at least two of your classmates’ posts outside of your own thread.

a. Use the following information on states of the economy and stock returns to calculate the expected return for Dingaling Telephone.

State of Economy

Probability of State of the Economy

Security Return if State Occurs

Recession

.30

-8%

Normal

.40

13

Boom

.30

23

Using the information in the previous question, calculate the standard deviation of returns.
Repeat Questions 1 & 2 assuming that all three states are equally likely.

State of Economy

Probability of State of the Economy

Security Return if State Occurs

Recession

.30

-8%

Normal

.40

13

Boom

.30

23

Explanation / Answer

State of Economy Probability of State of the Economy (A) Security Return if State Occurs (B) C =A*B D =(C-X)^2 D*A Recession 0.3 -8% -0.024 0.031329 0.009399 Normal 0.4 13% 0.052 0.001089 0.000436 Boom 0.3 23% 0.069 0.017689 0.005307 Expected Return (X) 9.70% Total 0.015141 Standard Deviation 12.30%

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