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Ravinder's Guitar Shop is expected to generate a 30% return in a boom market, a 15%...

Ravinder's Guitar Shop is expected to generate a 30% return in a boom market, a 15% return in a normal market, and a minus 25% (i.e. -25%) return in a recession. There is a 40% probability of a boom market, a 40% probability of a normal market and a 20% probability of a recession. What is (a) the expected return and (b) the standard deviation of Ravinder's Guitar Shop?

Solutions

Expert Solution

EXPECTED RETURN = 13%

STANDARD DEVIATION = 8.62%

RAVINDER GUITAR SHOP
PROBABLITY RETURN
BOOM 0.4 30.0%
NORMAL 0.4 15.0%
RECESSION 0.2 -25.0%
SECURITY A
EXPECTED RETURN =(0.4x30)+(0.4x15)+(0.2x(-25))
EXPECTED RETURN 13.00%
RAVINDER GUITAR SHOP
PROBABLITY EARNINGS return x MEAN return x - mean (return-mean)^2*pr
0.4 30% 0.12 0.0433 0.077 0.00588
0.4 15% 0.06 0.0433 0.017 0.00028
0.2 -25% -0.05 0.0433 -0.093 0.00871
average return 0.043333333 =(0.12+0.06-0.05) / 3 sum 0.0149
variance =sum/n-1 0.007433333
std deviation =(sum/n-1)^(1/2) 0.086216781

jeff jeffy answered 3 years ago
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