Consider the following information: Rate of Return if State Occurs State of Econ

Question

Consider the following information: Rate of Return if State Occurs State of Economy Recession Normal Boom Probability of State of Economy 0.20 0.50 0.30 Stock A 0.06 0.09 0.14 Stock B 0.22 0.15 0.34 Required: (a) Calculate the expected return for Stock A. (Do not round your intermediate calculations.) (Click to select) (b) Calculate the expected return for Stock B. (Do not round your intermediate calculations.) (Click to select) (c) Calculate the standard deviation for Stock A. (Do not round your intermediate calculations.) (Click to select) (d) Calculate the standard deviation for Stock B. (Do not round your intermediate calculations.) (Click to select)+

Explanation / Answer

Stock A:

Expected Return = 0.20 * 0.06 + 0.50 * 0.09 + 0.30 * 0.14
Expected Return = 0.099

Variance = 0.20 * (0.06 - 0.099)^2 + 0.50 * (0.09 - 0.099)^2 + 0.30 * (0.14 - 0.099)^2
Variance = 0.000849

Standard Deviation = (0.000849)^(1/2)
Standard Deviation = 0.0291

Stock B:

Expected Return = 0.20 * (-0.22) + 0.50 * 0.15 + 0.30 * 0.34
Expected Return = 0.133

Variance = 0.20 * (-0.22 - 0.133)^2 + 0.50 * (0.15 - 0.133)^2 + 0.30 * (0.34 - 0.133)^2
Variance = 0.037921

Standard Deviation = (0.037921)^(1/2)
Standard Deviation = 0.1947

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