Consider the following information: Probability of State Economy of Economy Rece

Question

Consider the following information: Probability of State Economy of Economy Recession Normal .64 Boom 24 Rate of Return if State Occurs Stock A Stock B .055 -.34 .135 .24 .230 .12 47 a. Calculate the expected return for the two stocks. (Do not round intermediate calculations and enter your answers as a percent rounded to 2 decimal places, e.g., 32.16.) Expected return E(RA) E(Re) b. Calculate the standard deviation for the two stocks. (Do not round intermediate calculations and enter your answers as a percent rounded to 2 decimal places, e.g., 32.16.) Standard deviation

Explanation / Answer

                                           27.32%

STOCK A State Probability (P) Returns(X ) (P * X ) P * (X -Average Return of X)^2 Recession 24% 5.5 1.32 12.5108 Normal 64% 13.5 8.64 0.3894 Boom 12% 23 2.76 12.6814 Total TOTAL 12.72 25.5816 Expected Return = (P * X) 12.72% VARIANCE = P * (X -Average Return of X)^2 25.5816 Standard Deviation = Square root of (P * (X -Average Return of X)^2) Square root of 25.5816 5.05783 STOCK B State Probability (P) Returns(X ) (P * X ) P * (X -Average Return of X)^2 Recession 24% -34 -8.16 526.5565 Normal 64% 24 15.36 79.7092 Boom 12% 47 5.64 140.0287 Total TOTAL 12.84 746.2944 Expected Return = (P * X) 12.84% VARIANCE = P * (X -Average Return of X)^2 746.2944 Standard Deviation = Square root of (P * (X -Average Return of X)^2) Square root of 746.2944 27.31839 Expected Return = STOCK A 12.72% STOCK B 12.84% Standard Deviation = STOCK A                                              5.06% STOCK B

                                           27.32%

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