Consider the following information: a. Calculate the expected return for the two

Question

Consider the following information:

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.)

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.)

Rate of Return
if State Occurs State of Economy Probability of State of Economy Stock A Stock B Recession 0.40 0.04 –0.20 Normal 0.25 0.13 0.13 Boom 0.35 0.17 0.33

Explanation / Answer

Expected Return for Stock A = 0.40 * 4% + 0.25 * 13% + 0.35 * 17%

Expected Return for Stock A = 10.80%

Expected Return for Stock B = (0.40 * (-20%)) + 0.25 * 13% + 0.35 * 33%

Expected Return for Stock B = 6.8%

Standard Deviation of Stock A = (0.40 * (4% - 10.80%)2 + 0.25 * (13% - 10.80%)2 + 0.35 * (17% - 10.80%)2)0.5

Standard Deviation of Stock A = 5.76%

Standard Deviation of Stock B = (0.40 * (-20% - 6.80%)2 + 0.25 * (13% - 6.80%)2 + 0.35 * (33% - 6.80%)2)0.5

Standard Deviation of Stock B = 23.18%

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