An investor purchases a share of Synovous Bank stock this morning for $2.80. The

Question

An investor purchases a share of Synovous Bank stock this morning for $2.80. The investor believes the economy will take one of three conditions in the coming year, and each condition will have an impact on the selling price of the stock. The investor’s beliefs about the economy are shown below:

What is the standard deviation for Synovous returns (based on the investor’s returns)?

Answer Format: Percentage Round to: 2 decimal places (Example: 9.24%, % sign required. Will accept decimal format rounded to 4 decimal places (ex: 0.0924))

OUTCOME: Probability Synovous Price in One Year Bad for Banks 0.40 $2.56 Moderate for Banks 0.44 $2.93 Good for Banks 0.16 $3.20

Explanation / Answer

Find the rate in each case:

Return = (Ending price + dividend - Initial price)/Initial price

Bad:

Return = (2.56 - 2.8)/2.8 = -8.57%

Moderate:

Return = (2.93-2.8)/2.8 = 4.64%

Good:

Return = (3.2-2.8)/2.8 = 14.29%

Average expected return is the individual return times probability

Average expected return = 0.4*-8.57% + 0.44*4.64% + 0.16*14.29% = 0.90%

Standard deviation is the square root of sum of squared deviations from the mean times the probability

Std dev = (0.4*(0.9-(-8.57))^2 + 0.44*(0.9-4.64)^2 + 0.16*(0.9-14.29)^2)^(1/2) = 8.41%

Related Questions

Navigate

• Browse (All)
• Browse A
• Subjects

---

---

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