Question

consider the following information state of economy recession probability of state of economy .18 rate of return if state occurs stock a .09

Problem 13-7 Calculating Returns and Standard Deviations [LO1] Consider the following information Rate of Return If State Occurs State of Probability of State of Economy 18 Economy Stock A Stock B Recession 09 -13 Normal Boom 59 12 17 16 23 33 a. Calculate the expected return for Stocks A and B. (Do not round intermediate calculations and enter your answers as a percent rounded to 2 decimal places, e.g.. 32.16.) b. Calculate the standard deviation for Stocks A and B. (Do not round intermediate calculations and enter your answers os o percent rounded to 2 decimal places, e.g.. 32.16.) Stock A expected return 6 of 11 <Prev

Answer 1

	Probability	Return of stock A	Probability x Return
Recession	18%	9%	1.62%
Normal	59%	12%	7.08%
Boom	23%	17%	3.91%
Expected Return on Stock A			12.61%
	Probability	Return of stock B	Probability x Return
Recession	18%	-13%	-2.34%
Normal	59%	16%	9.44%
Boom	23%	33%	7.59%
Expected Return on Stock B			14.69%
	Probability	Return of stock A	(return -Expected return)^2*Probability
Recession	18%	9%	0.00023
Normal	59%	12%	0.00002
Boom	23%	17%	0.00044
Total			0.00070
Standard deviation =Sqrt of .000700			2.65%
	Probability	Return of stock B	(return -Expected return)^2*Probability
Recession	18%	-13%	0.01
Normal	59%	16%	0.00
Boom	23%	33%	0.01
Total			0.02
Standard deviation= sqrt of .02			14.70%