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There is a 28.10% probability of a below average economy and a 71.90% probability of an...

There is a 28.10% probability of a below average economy and a 71.90% probability of an average economy. If there is a below average economy stocks A and B will have returns of -7.40% and 18.50%, respectively. If there is an average economy stocks A and B will have returns of 11.50% and -0.80%, respectively. Compute the:

a) Expected Return for Stock A :

b) Expected Return for Stock B :

c) Standard Deviation for Stock A:

d) Standard Deviation for Stock B :

Expert Solution

Expected Return for stock A : [-7.40 * .2810 ] + [11.50 * .7190]

=- 2.0794+ 8.2685

= 6.1891%

Expected return for stock B: [18.50 *.2810]+ [ -.80*.7190]

= 5.1985- .5752

= 4.6233%

standard deviation for Stock A: square root [(X1-ER)^2*P1]+[(X2-ER)^2*P2]

=SR[(-7.4-6.1891)^2*.2810]+ [(11.5 - 6.1891)^2*.7190]

= SR [(-13.5891)^2*.2810]+[(5.3109)^2*.7190]

=SR [51.8905+ 20.2799]

=SR[ 72.1704]

= 8.50%

Standard deviation for stock B: SR[(18.50 - 4.6233 )^2*.2810] +[(-.80-4.6233)^2*.7190]

= SR[ (13.8767)^2*.2810]+[(-5.4233)^2*.7190]

= SR [54.1101+ 21.1474]

= SR [75.2575]

= 8.68%

jeff jeffy answered 1 year ago

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