Given the following information: Probability of Occurence Expected return 20% -5% 40% 5% 30% 7% 10%...

Given the following information:

Probability of Occurence	Expected return
20%	-5%
40%	5%
30%	7%
10%	39%

You are considering buying stock in Seller Inc. If Seller Inc's expected returns are as shown above, what is the standard devidation of the stock? (Hint: you first must find weighted average expected return).

A. 8.999

B. 10.232

C. 11.524

D. 12.994

E. 14.506

Expert Solution

average Expected return=Respective returns*Respective probability

=(0.2*-5)+(0.4*5)+(0.3*7)+(0.1*39)=7%

probability	Return	probability*(Return-Mean)^2
0.2	-5	0.2*(-5-7)^2=28.8
0.4	5	0.4*(5-7)^2=1.6
0.3	7	0.3*(7-7)^2=0
0.1	39	0.1*(39-7)^2=102.4
		Total=132.8%

Standard deviation=[Total probability*(Return-Mean)^2/Total Probability]^(1/2)

which is equal to

=11.524(Approx).

jeff jeffy answered 2 years ago

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