Question

Consider the following information:
  

	Probability of State			Rate of Return if State Occurs
Economy	of Economy			Stock A				Stock B
Recession		.22				.045		–	.42
Normal		.62				.125			.32
Boom		.16				.310			.55

  
a. Calculate the expected return for the two stocks. (Do not round intermediate calculations and enter your answers as a percent rounded to 2 decimal places, e.g., 32.16.)

  

	Expected return
E(RA)		%
E(RB)		%

  
b. Calculate the standard deviation for the two stocks. (Do not round intermediate calculations and enter your answers as a percent rounded to 2 decimal places, e.g., 32.16.)

	Standard deviation
σA		%
σB		%

Please show work

Answer 1

Stock A
Scenario	Probability	Return%	=rate of return% * probability	Actual return -expected return(A)%	(A)^2* probability
Recession	0.22	4.5	0.99	-9.2	0.00186208
Normal	0.62	12.5	7.75	-1.2	8.928E-05
Boom	0.16	31	4.96	17.3	0.00478864
	a. Expected return %=	sum of weighted return =	13.7	Sum=Variance Stock A=	0.00674
			b. Standard deviation of Stock A%	=(Variance)^(1/2)	8.21
Stock B
Scenario	Probability	Return%	=rate of return% * probability	Actual return -expected return(A)%	(B)^2* probability
Recession	0.22	-42	-9.24	-61.4	0.08293912
Normal	0.62	32	19.84	12.6	0.00984312
Boom	0.16	55	8.8	35.6	0.02027776
	a. Expected return %=	sum of weighted return =	19.4	Sum=Variance Stock B=	0.11306
			b. Standard deviation of Stock B%	=(Variance)^(1/2)	33.62