3.10 00 points value: Consider the following information: Rate of Return If Stat

Question

3.10 00 points value: Consider the following information: Rate of Return If State Occurs State of Economy Probability of State of Economy Stock A StockB Recession Normal Boom .35 60 05 07 12 20 12 26 a. Calculate the expected return for the two stocks. (Round your answers to 2 decimal places. Omit the %" sign in your response.) Expected Return for A Expected Return for B b. Calculate the standard deviation for the two stocks. (Round your answers to 2 decimal places. Omit the "%" sign in your response.) Standard deviation for A Standard deviation for B

Explanation / Answer

Expected return is the weighted average of individual returns

Expected return for A = 0.35*0.07 + 0.6*0.12 + 0.05*0.17 = 0.1050 = 10.50%

Expected return for B = 0.35*-0.2 + 0.6*0.12 + 0.05*0.26 = 0.015 = 1.50%

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

Standard deviation for A = (0.35*(0.07-0.105)^2 + 0.6*(0.12-0.1050)^2 + 0.05*(0.17-0.105)^2)^(1/2) = 0.0278 = 2.78%

Standard deviaiton for B = (0.35*(0.015-(-0.2))^2 + 0.6*(0.015-0.12)^2 + 0.05*(0.015-0.26)^2)^(1/2) = 0.1606 = 16.06%

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