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	-0.21
Normal	0.60	0.09	0.13
Boom	0.30	0.15	0.32

  

Required:

(a)	Calculate the expected return for Stock A. (Do not round your intermediate calculations.)
	(Click to select)10.30%8.85%12.07%11.03%9.46%

  

(b)	Calculate the expected return for Stock B. (Do not round your intermediate calculations.)
	(Click to select)15.30%8.00%17.07%14.54%15.91%

  

(c)	Calculate the standard deviation for Stock A. (Do not round your intermediate calculations.)
	(Click to select)3.41%2.41%3.58%3.24%3.54%

  

(d)	Calculate the standard deviation for Stock B. (Do not round your intermediate calculations.)
	(Click to select)14.79%10.45%16.52%14.05%15.38%

Answer 1

(a) The correct answer is 10.30%

Note :

	Probability	Stock Return	Expected Return ( Probability * Expected Return)
Recession	0.10	0.04	0.0040
Normal	0.60	0.09	0.0540
Boom	0.30	0.15	0.0450
	Expected Return		0.103
	Expected Return   %		10.30

(b) The correct answer is 15.30%

Note:

	Probability	Stock Return	Expected Return ( Probability * Expected Return)
Recession	0.10	-0.21	-0.0210
Normal	0.60	0.13	0.0780
Boom	0.30	0.32	0.0960
	Expected Return		0.153
	Expected Return   %		15.30

(c)

The correct answer is 3.41%

Note:

	Probability	Probable Return	Deviation ( Probable Return- Expected Return)	Deviation Squared	Product ( Deviation Squared* Probability)
Recession	0.10	4.00	-6.30000	39.690	3.96900
Normal	0.60	9.00	-1.30000	1.690	1.01400
Boom	0.30	15.00	4.70000	22.090	6.62700
			Variance		11.61
			Standard Deviation (Square root of Variance)		3.41

(d) The correct answer is 14.79%

Note:

	Probability	Probable Return	Deviation ( Probable Return- Expected Return)	Deviation Squared	Product ( Deviation Squared* Probability)
Recession	0.10	-21.00	-36.30000	1317.690	131.76900
Normal	0.60	13.00	-2.30000	5.290	3.17400
Boom	0.30	32.00	16.70000	278.890	83.66700
			Variance		218.61
			Standard Deviation (Square root of Variance)		14.79