Question

Consider the following information: Rate of Return if State Occurs State of Economy Probability of State of Economy Stock A Stock B Recession 0.10 0.05 -0.18 Normal 0.60 0.08 0.14 Boom 0.30 0.13 0.33 Required: (a) Calculate the expected return for Stock A. (Do not round your intermediate calculations.) (b) Calculate the expected return for Stock B. (Do not round your intermediate calculations.) (c) Calculate the standard deviation for Stock A. (Do not round your intermediate calculations.) (d) Calculate the standard deviation for Stock B. (Do not round your intermediate calculations.)

Answer 1

(a)	Expected Return of Stock A				0.0920
(b)	Expected Return of Stock B				0.1650
(c)	Standard Deviation of Stock A				0.0264
(d)	Standard Deviation of Stock B				0.1430
Working:
		Stock A
	a.
		State of Economy			Probability of State of Economy				Rate of Return if State Occurs			Expected Return
		Recession			0.10				0.05			0.0050
		Normal			0.60				0.08			0.0480
		Boom			0.30				0.13			0.0390
					1.00							0.0920
	b.
		State of Economy			Probability of State of Economy				Rate of Return if State Occurs			Expected Return		Variance
		Recession			0.10				0.05			0.0920		0.000176
		Normal			0.60				0.08			0.0920		0.000086
		Boom			0.30				0.13			0.0920		0.000433
		Total												0.000696
		Standard Deviation		=	Variance ^ (1/2)
				=	0.000696	^ (1/2)
				=	0.0264
		Stock B
	a.
		State of Economy			Probability of State of Economy				Rate of Return if State Occurs			Expected Return
		Recession			0.10				-0.18			-0.0180
		Normal			0.60				0.14			0.0840
		Boom			0.30				0.33			0.0990
					1.00							0.1650
	b.
		State of Economy			Probability of State of Economy				Rate of Return if State Occurs			Expected Return		Variance
		Recession			0.10				-0.18			0.1650		0.011903
		Normal			0.60				0.14			0.1650		0.000375
		Boom			0.30				0.33			0.1650		0.008168
		Total												0.020445
		Standard Deviation		=	Variance ^ (1/2)
				=	0.020445	^ (1/2)
				=	0.1430