Question

Consider the following information:

		Rate of Return if State Occurs
State of	Probability of State
Economy	of Economy	Stock A	Stock B
Recession	0.21	0.040	–0.31
Normal	0.61	0.120	0.21
Boom	0.18	0.200	0.44

Requirement 1:

Calculate the expected return for the two stocks. (Do not include the percent signs (%). Round your answers to 2 decimal places (e.g., 32.16).)

Calculate the standard deviation for the two stocks. (Do not include the percent signs (%). Round your answers to 2 decimal places (e.g., 32.16).)

	Standard deviation
?A	__________________ %
?B	__________________%

Answer 1

1)
		Stock A	Stock B
Expected Return		11.76%	14.22%
Working:			Stock A		Stock B
	Probability of		Rate of return if State occurs	Expected Return	Rate of return if State occurs	Expected Return
State of Economy	State of Economy
Recession	0.21		0.040	0.0084	-0.31	-0.0651
Normal	0.61		0.120	0.0732	0.21	0.1281
Boom	0.18		0.200	0.036	0.44	0.0792
Total				0.1176		0.1422
2)
		Stock A	Stock B
Standard Deviation		4.99%	24.84%
Working:
Stock A:
	Probability of		Rate of return if State occurs (2)	Expected Return (3)	(4)=((2)-(3))^2)*(1)
State of Economy	State of Economy (1)
Recession	0.21		0.040	0.1176	0.0012646
Normal	0.61		0.120	0.1176	0.0000035
Boom	0.18		0.200	0.1176	0.0012222
Variance					0.0024902
Standard Deviation		=	Variance ^(1/2)
		=	0.0024902	^ (1/2)
		=	4.99%
Stock B:
	Probability of		Rate of return if State occurs (2)	Expected Return (3)	(4)=((2)-(3))^2)*(1)
State of Economy	State of Economy (1)
Recession	0.21		-0.310	0.1422	0.0429418
Normal	0.61		0.210	0.1422	0.0028041
Boom	0.18		0.440	0.1422	0.0159633
Variance					0.0617092
Standard Deviation		=	Variance ^(1/2)
		=	0.0617092	^ (1/2)
		=	24.84%