Question

FIN300 Inc.'s manager believes that economic conditions during the next year will be strong, normal, or weak, and she thinks that the firms returns will have the probability distribution shown below. What are the expected return and the standard deviation of the estimated returns?

Economic Conditions Prob. Return

Strong 15% 22.0%

Normal 50% 10.0%

Weak 35% -12.0%

Can someone please help me solve this using written out formulas? Thank you.

Answer 1

State	Probability (P)	Return	P*Return	Deviation form expected return (D)	PD^2
Strong	0.15	22.00	3.30	17.90	48.06
Normal	0.50	10.00	5.00	5.90	17.41
Weak	0.35	(12.00)	(4.20)	(16.10)	90.72

Expected Return = P*Return

= 3.3+5-4.2

= 4.10%

Variance = PD^2

= 48.06+17.41+90.72

= 156.19

standard deviation  = Variance

= 156.19

= 12.50%