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The following data represent the probability distribution of the holding period returns for an investment in...

The following data represent the probability distribution of the holding period returns for an investment in Lazy Rapids Kayaks (LARK) stock. State of the Economy Scenario #(s) Probability, p(s) HPR Boom 1 0.324 30.80% Normal growth 2 0.396 8.90% Recession 3 0.28 -18.00% a. What is the expected return on LARK? (Round your answer to 2 decimal places.) Expected return % b. What is the standard deviation of the returns on LARK? (Round your answer to 2 decimal places.) Standard deviation %

Solutions

Expert Solution

Expected return=Respective return*Respective probability

=(0.324*30.8)+(0.396*8.9)+(0.28*-18)

=8.4636%

=8.46%(Approx)

Probability Return Probability*(Return-Expected Return)^2
0.324 30.8 0.324*(30.8-8.4636)^2=161.648384
0.396 8.9 0.396*(8.9-8.4636)^2=0.0754162042
0.28 -18 0.28*(-18-8.4636)^2=196.090195
Total=357.813995%

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

=(357.813995)^(1/2)

=18.92%(Approx)

jeff jeffy answered 2 years ago
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