Question

ased on the following information, the expected return and standard deviation for Stock A are ________percent and ________percent, respectively. The expected return and standard deviation for Stock B are _______ percent and ______percent, respectively. (Do not include the percent signs (%). Round your answers to 2 decimal places. (e.g., 32.16))

		Rate of Return if State Occurs
State of Economy	Probability of State of Economy	Stock A	Stock B
Recession	0.1	0.04	-0.2
Normal	0.7	0.09	0.15
Boom	0.2	0.15	0.31

Answer 1

a) Calculation of expected return of stock A:
State	Probability(a)	Return(%) (b)	(a)*(b)
Recession	0.1	4	0.4
Normal	0.7	9	6.3
Boom	0.2	15	3
	Expected Return		9.70
Therefore expected return of stock A is 9.70%
Calculation of expected return of stock B:
State	Probability(a)	Return(%) (b)	(a)*(b)
Recession	0.1	-20	-2
Normal	0.7	15	10.5
Boom	0.2	31	6.2
	Expected Return		14.70
Therefore expected return of stock B is 14.70%
(b) Calculation of standard deviation of Stock A:
	Probability(a)	Return	(return- expected return)	(return- expected return)^2 (b)	(a*b)
Recession	0.1	4	-5.7	32.49	3.249
Normal	0.7	9	-0.7	0.49	0.343
Boom	0.2	15	5.3	28.09	5.618
					9.21
Standard deviation of Stock A= (9.21)^1/2= 3.03%
Calculation of standard deviation of Stock B:
	Probability(a)	Return	(return- expected return)	(return- expected return)^2 (b)	(a*b)
Recession	0.1	-20	-34.7	1204.09	120.409
Normal	0.7	15	0.3	0.09	0.063
Boom	0.2	31	16.3	265.69	53.138
					173.61
Standard deviation of Stock B= (173.61)^1/2= 13.18%