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 0.20 0.05 –0.20 Normal 0.40 0.10 0.10 Boom 0.40 0.13 0.25

Explanation / Answer

a.

Hence the Expected Return of Stock A = 10.20%

Hence the expected return of Stock B is 10.00%

b.

Hence, The Standard Deviation is:

A = 2.93%

B = 16.43%

` Probability Stock A Expected Return A ( Probability * Expected Return) Recession 0.20 0.05 0.0100 Normal 0.40 0.10 0.0400 Boom 0.40 0.13 0.0520 Expected Return  A 0.1020 Expected Return  A % 10.20

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