Question

Consider the following possible stock prices in one year for STY stock.

Possible Outcome Price Probability

Pessimistic 150 25%

Most likely 220 45%

Optimistic 250 30%

A) If the STY stock is currently trading at $200, What is the expected return of STY stock? Enter your answer as a percent, do not include the % sign. Round your final answer to two decimals.

B) If the STY stock is currently trading at $200, What is the standard deviation of STY stock returns? Enter your answer as a percent, do not include the % sign. Round your final answer to two decimals.

Answer 1

A) expected return of STY stock = 2.12

Note:

State of Economy	Probability	Expected Stock Return on Stock	Expected Return ( Probability * Expected Stock Return)
Pessimistic	0.25	150	37.5000
Most likely	0.45	220	99.0000
Optimistic	0.30	250	75.0000
	Expected Return		211.50
	Expected Return   %		2.12

B) standard deviation of STY stock returns = 37.72

State of Economy	Probability	Probable Return	Deviation ( Probable Return- Expected Return)	Deviation Squared	Product ( Deviation Squared* Probability)
Pessimistic	0.25	150.00	-61.50	3,782.25	945.56
Most likely	0.45	220.00	8.50	72.25	32.51
Optimistic	0.30	250.00	38.50	1,482.25	444.68
			Variance ( Sum of Product)		1,422.75
			Standard Deviation (Square root of Variance)		37.72