Consider the following information: Rate of Return if State Occurs State of Prob

Question

Consider the following information: Rate of Return if State Occurs State of Probability of EconomyState of Recession Normal Boom Stock A Stock B conomy 60 .30 .04 09 17 17 12 .27 o. 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. 3216.) Stock A expected return Stock B expected return Stock A standard deviation Stock B standard deviation

Explanation / Answer

A:

Expected return=Respective return*Respective probability

=(0.1*4)+(0.6*9)+(0.3*17)=10.9%

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

=(18.09)^(1/2)

which is equal to

=4.25%(Approx).

B:

Expected return=Respective return*Respective probability

=(0.1*-17)+(0.6*12)+(0.3*27)=13.6%

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

=(149.041)^(1/2)

which is equal to

=12.21%(Approx).

probability Return probability*(Return-Expected return)^2 0.1 4 0.1*(4-10.9)^2=4.761 0.6 9 0.6*(9-10.9)^2=2.166 0.3 17 0.3*((17-10.9)^2=11.163 Total=18.09%

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