Question

You are considering two stocks and have determined the following information: Stock A Return Probability of the Return 21 % 50 % 12 10 5 40 Stock B Return Probability of the Return 32 % 10 % 15 60 8 30 Which of the two stocks has the higher expected return? Round your answers to two decimal places. The return on Stock A: % The return on Stock B: % has the higher expected return. Which stock is riskier? Do not round intermediate calculations. Round your answers to two decimal places. Standard deviation of Stock A: Standard deviation of Stock B: is riskier.

Answer 1

The correct answers are:

The stock with the  higher expected return = Stock B

Return on Stock A = 13.70 %

Return on Stock B = 14.60%

Standard deviation of Stock A = 7.56%

Standard deviation of Stock B= 6.59%

Stock A is riskier

-----------

Notes:

For Stock A:

Probability	Expected Stock Return	Expected Return ( Probability * Expected Stock Return)
0.50	0.21	0.1050
0.10	0.12	0.0120
0.40	0.05	0.0200
Expected Return		0.1370
Expected Return   %		13.70

Probability	Probable Return	Deviation ( Probable Return- Expected Return)	Deviation Squared	Product ( Deviation Squared* Probability)
0.50	21.00	7.30000	53.290	26.64500
0.10	12.00	-1.70000	2.890	0.28900
0.40	5.00	-8.70000	75.690	30.27600
		Variance ( Sum of Product)		57.21
		Standard Deviation (Square root of Variance)		7.56

For Stock B:

Probability	Stock B Return	Expected Return   ( Probability * Expected Return
0.10	0.32	0.0320
0.60	0.15	0.0900
0.30	0.08	0.0240
	Expected Return	0.1460
	Expected Return %	14.60

Probability	Probable Return	Deviation ( Probable Return- Expected Return)	Deviation Squared	Product ( Deviation Squared* Probability)
0.10	32.00	17.4	302.76	30.276
0.60	15.00	0.4	0.16	0.096
0.30	8.00	-6.6	43.56	13.068
		Variance		43.44
		Standard Deviation		6.59