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 0.20 0.55 0.25 Stock A Stock B 0.06 0.13 0.18 0.17 0.37 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.) Expected return for A Expected return for B 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.) Standard deviation for A Standard deviation forB

Explanation / Answer

STOCK A State Probability (P) Returns(X ) (P * X ) P * (X -Average Return of X)^2 Recession 20% 6 1.2 9.3845 Normal 55% 13 7.15 0.0124 Boom 25% 18 4.5 6.6306 Total TOTAL 12.85 16.0275 Expected Return = (P * X) 12.85% VARIANCE = P * (X -Average Return of X)^2 16.0275 Standard Deviation = Square root of (P * (X -Average Return of X)^2) Square root of 16.0275 4.00344 STOCK B State Probability (P) Returns(X ) (P * X ) P * (X -Average Return of X)^2 Recession 20% -11 -2.2 150.1520 Normal 55% 17 9.35 0.1980 Boom 25% 37 9.25 106.0900 Total TOTAL 16.4 256.4400 Expected Return = (P * X) 16.40% VARIANCE = P * (X -Average Return of X)^2 256.4400 Standard Deviation = Square root of (P * (X -Average Return of X)^2) Square root of 256.4400 16.01374 Expected Return = STOCK A 12.85% STOCK B 16.40% Standard Deviation = STOCK A                                              4.00 % STOCK B                                            16.01 %

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