Consider the following information: Rate of Return if State Occurs State of Econ
ID: 2808794 • Letter: C
Question
Consider the following information: Rate of Return if State Occurs State of Economy Probability of State of Economy Stock A Stock B Recession 0.10 0.05 -0.18 Normal 0.60 0.08 0.14 Boom 0.30 0.13 0.33 Required: (a) Calculate the expected return for Stock A. (Do not round your intermediate calculations.) (b) Calculate the expected return for Stock B. (Do not round your intermediate calculations.) (c) Calculate the standard deviation for Stock A. (Do not round your intermediate calculations.) (d) Calculate the standard deviation for Stock B. (Do not round your intermediate calculations.)
Explanation / Answer
(a) Expected Return of Stock A 0.0920 (b) Expected Return of Stock B 0.1650 (c) Standard Deviation of Stock A 0.0264 (d) Standard Deviation of Stock B 0.1430 Working: Stock A a. State of Economy Probability of State of Economy Rate of Return if State Occurs Expected Return Recession 0.10 0.05 0.0050 Normal 0.60 0.08 0.0480 Boom 0.30 0.13 0.0390 1.00 0.0920 b. State of Economy Probability of State of Economy Rate of Return if State Occurs Expected Return Variance Recession 0.10 0.05 0.0920 0.000176 Normal 0.60 0.08 0.0920 0.000086 Boom 0.30 0.13 0.0920 0.000433 Total 0.000696 Standard Deviation = Variance ^ (1/2) = 0.000696 ^ (1/2) = 0.0264 Stock B a. State of Economy Probability of State of Economy Rate of Return if State Occurs Expected Return Recession 0.10 -0.18 -0.0180 Normal 0.60 0.14 0.0840 Boom 0.30 0.33 0.0990 1.00 0.1650 b. State of Economy Probability of State of Economy Rate of Return if State Occurs Expected Return Variance Recession 0.10 -0.18 0.1650 0.011903 Normal 0.60 0.14 0.1650 0.000375 Boom 0.30 0.33 0.1650 0.008168 Total 0.020445 Standard Deviation = Variance ^ (1/2) = 0.020445 ^ (1/2) = 0.1430
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