Question

The following are estimates for 2 stocks.

Stock	Expected ret.	beta	firm-specific variance, or Var(e)
A	13%	0.6	0.4
B	18%	0	0.35

The market index has a standard deviation of 0.13, and the risk-free rate if 0.03

What is the standard deviation of stock A's return?

What is the standard deviation of stock B's return?

Please round both answers to 4 decimal places.

Answer 1

A	B	C	D	E	F	G
2
3		Calculation of Standard deviation of Stock A:
4		β	0.6
5		σM	13%
6		σ2(e)	40%
7
11		Where σ is total variance of the stock which is given by following formula:
12		(σ)2	=(β)2 (σM)2+σ2(e)
13
14		Total Variance σ can be calculated as follows:
15		(σ)2	=(β)2 (σM)2+σ2(e)
16			=(0.6)2 (13%)2+40%
17			40.61%	=(D4^2)*(D5^2)+D6
18
19		Standard deviation of stock A	63.7247%	=SQRT(D14)
20
21		Calculation of Standard deviation of Stock B:
22		β	0
23		σM	13%
24		σ2(e)	35%
25
26		Where σ is total variance of the stock which is given by following formula:
27		(σ)2	=(β)2 (σM)2+σ2(e)
28
29		Total Variance σ can be calculated as follows:
30		(σ)2	=(β)2 (σM)2+σ2(e)
31			=(0)2 (13%)2+40%
32			35.00%	=(D19^2)*(D20^2)+D21
33
34		Standard deviation of stock B	59.1608%	=SQRT(D29)
35