Question

Consider the following information: STOCK D Economy Recession Normal Boom Probability of State of Economy .23 .63 .14 Rate of Return if State Occurs Stock A Stock B .050 -.43 .130 .33 .320 .56 a. Calculate the expected return for the two stocks. (Do not round intermediate calculations and enter your answers as a percent rounded to 2 decimal places, e.g., 32.16.) Expected return E(RA) E(RB) b. Calculate the standard deviation for the two stocks. (Do not round intermediate calculations and enter your answers as a percent rounded to 2 decimal places, e.g., 32.16.) Standard deviation OA Ов %

Answer 1

a.			Expected return
	Stock A		13.82%
	Stock B		18.74%
Working:
	Stock A:					Stock B:
	Economy	Probability	rate of return			Economy	Probability	rate of return
		a	b	c=a*b			a	b	c=a*b
	Recession	0.23	0.05	1.15%		Recession	0.23	-0.43	-9.89%
	Normal	0.63	0.13	8.19%		Normal	0.63	0.33	20.79%
	Boom	0.14	0.32	4.48%		Boom	0.14	0.56	7.84%
	Expected return			13.82%		Expected return			18.74%
b.			Standard deviation
	Stock A		8.04%
	Stock B		9.42%
Working:
	Calculation of variance:
	Stock A:						Stock B:
	Economy	Probability	rate of return	Expected return			Economy	Probability	rate of return	Expected return
		a	b	c	d=((b-c)^2)*a			a	b	c	d=((b-c)^2)*a
	Recession	0.23	0.05	13.82%	0.001789225		Recession	0.23	0.05	18.74%	0.004342115
	Normal	0.63	0.13	13.82%	0.000042361		Normal	0.63	0.13	18.74%	0.002075699
	Boom	0.14	0.32	13.82%	0.004627174		Boom	0.14	0.32	18.74%	0.002461586
	Variance				0.00645876		Variance				0.0088794
	Standard deviation		=	Variance ^ (1/2)			Standard deviation		=	Variance ^ (1/2)
			=	0.006459	^(1/2)				=	0.008879	^(1/2)
			=	8.04%					=	9.42%