1. The returns on shares of Laverne Corporation and Shirley Corporation are predicted under the following...

1. The returns on shares of Laverne Corporation and Shirley Corporation are predicted under the following various economic conditions:

State of Economy	Return on Laverne	Return on Shirley
Recession	-20%	-30%
Stagnant	+0%	-5%
Moderate Growth	+10%	+10%
Boom	+30%	+65%

Each economic state has a 25% probability of occurring.

What are the expected returns of each stock?
What are the variances of each stock?
What are the standard deviatiions of each stock?

Expert Solution

Laverne
Scenario	Probability	Return	'=rate of return * probability	Actual return -expected return(A)	(A)^2* probability
Recession	0.25	-20.00%	-5.00%	-25.00%	0.015625
Stagnant	0.25	0.00%	0.00%	-5.00%	0.000625
Moderate Growth	0.25	10.00%	2.50%	5.00%	0.000625
Boom	0.25	30%	7.50%	25.00%	0.015625
	Expected return =	sum of weighted return =	5.00%	Sum= variance =	0.032500
			Standard deviation of Laverne	'=(sum)^(1/2)	18.03%

Shirley
Scenario	Probability	Return	'=rate of return * probability	Actual return -expected return(B)	(B)^2* probability
Recession	0.25	-30%	-7.50%	-40.00%	0.040000
Stagnant	0.25	-5%	-1.25%	-15.00%	0.005625
Moderate Growth	0.25	10%	2.50%	0.00%	0.000000
Boom	0.25	65%	16.25%	55.00%	0.075625
	Expected return =	sum of weighted return =	10.00%	Sum= variance =	0.121250
			Standard deviation of Shirley	'=(sum)^(1/2)	34.82%

jeff jeffy answered 2 years ago

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