Question

the common stock of great lakes concrete ltd. expected to provide a -10% return if the economy tanks and 18% return if the economy is booming. There is equal probability for the economy sliding into recession or streaming ahead at full employment gdp level.

A) what is the expected return on great lakes stock?
B) what is the standard deviation?

Answer 1

Answers

A)Expected Return of Stock = 4%

B) Standard Deviation of Stock = 14%

Solution

A) Computation of Expected Return on Stock

Probability	Return (X)	Probability * Return (X)
0.5	-10	-5
0.5	18	9
Total		4

Expected Return on Stock (X) = 0.5(-10) + 0.5(18)

                                                    = -5 + 9

                                                    = 4%

B) Computation of Standard Deviation

i)Variance of the Stock

Expected Return (X) = 4%

Probability	Return      (X)	Variance of Stock    P(X-X)­2
0.5	-10	98
0.5	18	98
Total		196(%)2

ii) Standard Deviation of The Stock =

=

= 14%