In: Finance
Consider the following information: Rate of Return if State Occurs State of Economy Probability of State of Economy Stock A Stock B Recession 0.30 0.06 –0.20 Normal 0.30 0.11 0.11 Boom 0.40 0.15 0.28 a. Calculate the expected return for the two stocks. (Do not round intermediate calculations. Enter your answers as a percent rounded to 2 decimal places.) b. Calculate the standard deviation for the two stocks. (Do not round your intermediate calculations. Enter your answers as a percent rounded to 2 decimal places.)
Expected Return of A = 11.10%
Expected Return of B = 8.50%
Standard Deviation of A = 3.73%
Standard Deviation of B = 19.94%
Notes:
Stock A:
State of Economy | Probability | Expected Stock Return on Stock | Expected Return ( Probability * Expected Stock Return) |
Recession | 0.30 | 0.06 | 0.0180 |
Normal | 0.30 | 0.11 | 0.0330 |
Boom | 0.40 | 0.15 | 0.0600 |
Expected Return | 0.1110 | ||
Expected Return % | 11.10 % |
State of Economy | Probability | Probable Return | Deviation ( Probable Return- Expected Return) | Deviation Squared | Product ( Deviation Squared* Probability) |
Recession | 0.30 | 6.00 | -5.100 | 26.010000 | 7.80300 |
Normal | 0.30 | 11.00 | -0.100 | 0.010000 | 0.00300 |
Boom | 0.40 | 15.00 | 3.900 | 15.210000 | 6.08400 |
Variance ( Sum of Product) | 13.89000 | ||||
Standard Deviation (Square root of Variance) | 3.73 % |
Stock B:
State of Economy | Probability | Stock Return | Expected Return ( Probability * Expected Return |
Recession | 0.30 | -0.20 | -0.0600 |
Normal | 0.30 | 0.11 | 0.0330 |
Boom | 0.40 | 0.28 | 0.1120 |
Expected Return | 0.0850 | ||
Expected Return % | 8.50 % |
State of Economy | Probability | Probable Return | Deviation ( Probable Return- Expected Return) | Deviation Squared | Product ( Deviation Squared* Probability) |
Recession | 0.30 | -20.00 | -28.5 | 812.25 | 243.675 |
Normal | 0.30 | 11.00 | 2.5 | 6.25 | 1.875 |
Boom | 0.4 | 28.00 | 19.5 | 380.25 | 152.1 |
Variance | 397.6500 | ||||
Standard Deviation | 19.94% |