Consider the following information Rate of Return If State Occurs State of Proba

Question

Consider the following information Rate of Return If State Occurs State of Probability of Economy Economy Recession Normal Boom State of Stock A 06 09 14 Stock B 17 12 29 17 50 a. Calculate the expected return for Stocks A and B. (Do not round intermediate calculations and enter your answers as a percent rounded to 2 decimal places, e.g. 32.16.) b. Calculate the standard deviation for Stocks A and B. (Do not round intermediate calculations and enter your answers as a percent rounded to 2 decimal places, e.g., 32.16.) a. |Stock A expected return 10.14% 12.681% Stock B expected return b. Stock A standard deviation Stock B standard deviation

Explanation / Answer

A:

Expected return=Respective return*Respective probability

=(0.17*6)+(0.5*9)+(0.33*14)=10.14%

Standard deviation=[Total probability*(Return-Expected Return)^2/Total probability]^(1/2)

=2.91%(Approx).

B:

Expected return=Respective return*Respective probability

=(0.17*-17)+(0.5*12)+(0.33*29)=12.68%

Standard deviation=[Total probability*(Return-Expected Return)^2/Total probability]^(1/2)

=15.42%(Approx).

probability Return probability*(Return-Expected Return)^2 0.17 6 0.17*(6-10.14)^2=2.913732 0.5 9 0.5*(9-10.14)^2=0.6498 0.33 14 0.33*(14-10.14)^2=4.916868 Total=8.4804%

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