Question

In: Finance

A company will earn 10% returns in a poor economy, 15% returns in a normal economy,...

A company will earn 10% returns in a poor economy, 15% returns in a normal economy, and 25% returns in a booming economy. What is the standard deviation if there is a 25% chance of a poor economy and a 25% chance of a booming economy?

5.45%

4.91%

10.83%

11.18%

6.12%

Solutions

Expert Solution

SD = SQRT [ Sum [ Prob * ( X - Avg X)^2 ] ]

Avg Ret = Sum [ Prob * Ret ]

Avg Ret:

Scenario Prob Ret Exp Ret
Poor Economy          0.25 10%     0.0250
Normal Economy          0.50 15%     0.0750
Booming Economy          0.25 25%     0.0625
Expected Ret 0.1625

SD:

Scenario Prob Ret (X) X - Avg X (X - Avg X)^2 Prob(X-Avg X)^2
Poor Economy          0.25     0.1000    -0.0625     0.0039                   0.0010
Normal Economy          0.50     0.1500    -0.0125     0.0002                   0.0001
Booming Economy          0.25     0.2500     0.0875     0.0077                   0.0019
Variance = Sum [ Prob * (X-Avg X)^2 ]                   0.0030
SD = SQRT [ Variance ]                   0.0545

Thus SD is 5.45%

jeff jeffy answered 1 year ago
Next > < Previous

Related Solutions

9. Mr. Richards has a new client will earn much higher returns than normal because of...
9. Mr. Richards has a new client will earn much higher returns than normal because of their risk profile. The client will role $75,000 into an account with the firm and then they will make additional monthly deposits of $2,000 per month for the next 25 years. He also wants to illustrate the returns for a bank CD at 2%, market returns at 4% and normal returns for him of 8%. To further illustrate the power of his returns, he...
State of the world Probability Security Returns X Security Returns Market Boom .30 .25 .15 Normal...
State of the world Probability Security Returns X Security Returns Market Boom .30 .25 .15 Normal .40 .07 .10 Recession .30 .03 .05 E(Rx).112 E(RMkt).10 =.008436 =.0015 Is this distribution symmetrical? Calculate the covariance. Calculate the variance of the portfolio made up of 30% X and 70% of the Market. Find the Beta for the firm. Find the correlation coefficient. What does the beta measure? Assuming the beta calculated above, and assuming E(RM) = 12%; Rf= 8% Find the price...
Economy Probability Return Stock A. Return Stock B Good. 20% 20%. 30% Normal. 50%. 15%. 10%...
Economy Probability Return Stock A. Return Stock B Good. 20% 20%. 30% Normal. 50%. 15%. 10% bad. 30%. 10%. 5% What are the expected return and standard deviation of stock A and B? Whats the correlation coefficient betweennthe two stocks?
A fruit company has 20% returns in periods of normal rainfall and -3% returns in droughts....
A fruit company has 20% returns in periods of normal rainfall and -3% returns in droughts. The probability of normal rainfall is 60% and droughts 40%. What would the fruit company’s expected returns be? 24% 10.8% 0 1.1 %
(a) A stock’s returns for the past 3 years are 10%, -15%, and 35%. What is...
(a) A stock’s returns for the past 3 years are 10%, -15%, and 35%. What is the historical Average return? What is the historical sample standard deviation? (b). What is the Efficient Markets Hypothesis (EMH)? (c). i. Suppose you observed that High-Level managers make superior returns on investments in the company’s stock, would this be a violation of weak-form Market Efficiency? Would it be a violation of strong-form Market Efficiency? If the weak-form of the efficient market Hypothesis is valid,...
Returns to Scale in Economy.
What do you understand by Returns to Scale in Economics?  What do you unserstand by Economies of Large Scale Production? What are the categories of Economies of Large Scale Production?  Define Internal Economies of Scale. 
Returns to Scale in Economy.
What do you understand by External Economies of Scale? How do they become Diseconomies?
Investment Forecasted Returns for Boom Economy Forecasted Returns for Stable Growth Economy Forecasted Returns for Stagnant...
Investment Forecasted Returns for Boom Economy Forecasted Returns for Stable Growth Economy Forecasted Returns for Stagnant Economy Forecasted Returns for Recession Economy Stock 26% 11% 7% -15% Corporate bond 9% 7% 5% 4% Government bond 8% 6% 4% 3% Variance and standard deviation ​(expected). Bacon and​ Associates, a famous Northwest think​ tank, has provided probability estimates for the four potential economic states for the coming year in the following​ table: The probability of a boom economy is 21%​, the probability...
RTF stock is expected to return 11 percent in a normal economy and lose 15 percent...
RTF stock is expected to return 11 percent in a normal economy and lose 15 percent in recession. The probability of a recession is 33 percent while the probability of a booming economy is zero percent. What is the variance of the returns on RTF stock?
RTF stock is expected to return 11 percent in a normal economy and lose 15 percent...
RTF stock is expected to return 11 percent in a normal economy and lose 15 percent in recession. The probability of a recession is 33 percent while the probability of a booming economy is zero percent. What is the variance of the returns on RTF stock?
ADVERTISEMENT
Subjects
ADVERTISEMENT
Latest Questions
ADVERTISEMENT