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Compute the standard deviation given these four economic states, their likelihoods, and the potential returns: Economic...

Compute the standard deviation given these four economic states, their likelihoods, and the potential returns: Economic State Probability Return Fast Growth 0.35 40% Slow Growth 0.45 10% Recession 0.10 -10% Depression 0.10 -100% 39.48 percent 12.65 percent 113.69 percent 7.5 percent

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Expert Solution

The correct answer is 39.48 percent

Note:

State of Economy Probability Expected Stock Return on Stock Expected Return ( Probability * Expected Stock Return)
Fast Growth 0.35 0.40 0.1400
Slow Growth 0.45 0.10 0.0450
Recession 0.10 -0.10 -0.0100
Depression 0.10 -1       -0.1000
Expected Return   0.0750
Expected Return   % 7.50
State of Economy Probability Probable Return Deviation ( Probable Return- Expected Return) Deviation Squared Product ( Deviation Squared* Probability)
Fast Growth 0.35 40.00 32.50000 1056.250 369.68750
Slow Growth 0.45 10.00 2.50000 6.250 2.81250
Recession 0.10 -10.00 -17.50000 306.250 30.62500
Depression 0.10 -100.00 -107.50000 11556.250 1155.62500
Variance ( Sum of Product) 1,558.75
Standard Deviation (Square root of Variance) 39.48

jeff jeffy answered 2 years ago
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