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 0.04 -0.18 Normal 0.70 0.08 0.12 Boom 0.20 0.12 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

The correct answer is

a) 8.40%

b) 13.20%

c) 2.15%

d) 13.30%

Note :

For Stock A:

	Probability	Stock AReturn	Expected Return ( Probability * Expected Return)
Recession	0.10	0.04	0.00
Normal	0.70	0.08	0.06
Boom	0.20	0.12	0.02
	Expected Return		0.0840
	Expected Return   %		8.40
Stock A	Probability	Probable Return	Deviation ( Probable Return- Expected Return)	Deviation Squared	Product ( Deviation Squared* Probability)
Recession	0.10	4.00	-4.40	19.36	1.94
Normal	0.70	8.00	-0.40	0.16	0.11
Boom	0.20	12.00	3.60	12.96	2.59
			Variance		4.64
			Standard Deviation (Square root of Variance)		2.15

Stock B:

	Probability	Stock B Return	Expected Return   ( Probability * Expected Return
Recession	0.10	-0.18	-0.0180
Normal	0.70	0.12	0.0840
Boom	0.20	0.33	0.0660
		Expected Return	0.132
		Expected Return  %	13.20
Stock B	Probability	Probable Return	Deviation ( Probable Return- Expected Return)	Deviation Squared	Product ( Deviation Squared* Probability)
Recession	0.10	-18.00	-31.2	973.44	97.344
Normal	0.70	12.00	-1.2	1.44	1.008
Boom	0.20	33.00	19.8	392.04	78.408
			Variance		176.76
			Standard Deviation		13.30