Consider the following information Rate of Return If State Occurs State of Econo

Question

Consider the following information Rate of Return If State Occurs State of Economy Recession Normal Boom Probability of State of Economy Stock A 06 09 Stock B 21 58 21 - 21 08 25 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.) ected 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:

Expected Return = 0.21 * 0.06 + 0.58 * 0.09 + 0.21 * 0.14
Expected Return = 0.0942

Variance = 0.21 * (0.06 - 0.0942)^2 + 0.58 * (0.09 - 0.0942)^2 + 0.21 * (0.14 - 0.0942)^2
Variance = 0.000696

Standard Deviation = (0.000696)^(1/2)
Standard Deviation = 0.0264
Standard Deviation = 2.64%

Stock B:

Expected Return = 0.21 * (-0.21) + 0.58 * 0.08 + 0.21 * 0.25
Expected Return = 0.0548

Variance = 0.21 * (-0.21 - 0.0548)^2 + 0.58 * (0.08 - 0.0548)^2 + 0.21 * (0.25 - 0.0548)^2
Variance = 0.023095

Standard Deviation = (0.023095)^(1/2)
Standard Deviation = 0.1520
Standard Deviation = 15.20%

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