Question
In: Finance
The following data represent the probability distribution of the holding period returns for an investment in...
The following data represent the probability distribution of the holding period returns for an investment in Lazy Rapids Kayaks (LARK) stock.
| State of the Economy | Scenario #(s) | Probability, p(s) | HPR |
| Boom | 1 | 0.328 | 30.00% |
| Normal growth | 2 | 0.402 | 9.40% |
| Recession | 3 | 0.27 | -18.30% |
a. What is the expected return on LARK? (Round your answer to 2 decimal places.)
Expected return %
b. What is the standard deviation of the returns on LARK? (Round your answer to 2 decimal places.)
Standard deviation %
Solutions
Expert Solution
A) Expected return = probability × return
= 0.328 × 30% + 0.402 × 9.40% + 0.27 × (-18.30%)
= 9.84% + 3.78% - 4.94%
= 8.68%
B) Standard deviation= √ probability (return - expected return)^2
= √ 0.328 × (0.30 - 0.0868)^2 + 0.402 (0.0940 - 0.0868)^2 + 0.27 (-0.1830 - 0.0868)^2
= √ 0.328 (0.2132)^2 + 0.402 (0.0072)^2 + 0.27 (-0.2698)^2
= √ 0.328 (0.04545) + 0.402 ( 0.00005184) + 0.27 (0.07279)
= √ 0.01491 + 0.00002084 + 0.01965
= √ 0.034581
= 0.1860 or 18.60%
jeff jeffy answered 2 years agoRelated Solutions
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Sudha Krishnaswami Lecture Notes
Page 1 of 3
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