Question

Consider the following information: State of Economy Recession Normal Boom Rate of Return if State Occurs Probability of State of Economy Stock A Stock B 0.30 0.96 -0.20 0.55 0.15 0.15 0.15 0.18 0.35 a. Calculate the expected return for the two stocks. (Do not round intermediate calculations. Enter your answers as a percent rounded to 2 decimal places.) Expected return for A Expected return for B b. Calculate the standard deviation for the two stocks. (Do not round your intermediate calculations. Enter your answers as a percent rounded to 2 decimal places.) Standard deviation for A Standard deviation for B

Answer 1

CALCULATION FOR STOCK A PDx RETURN (IN %) DX=X-X PROBABILITY (X) (P) 13.66875 -6.75 6 0.3 2.784375 2.25 15 0.55 5.25 4.134375 18 0.15 VARIANCE (ΣPDX - 20.5875 EXPECTED RETURN (X) 12.75 [ΣΡΧ) 4.54 V20.5875 STANDARD DEVIATION = VARIANCE

CALCULATION FOR STOCK B PDY2 DY Y-Y RETURN (IN %) PROBABILITY (Y) (P) 226.875 -27.5 -20 0.3 30.9375 7.5 15 0.55 27.5 113.4375 0.15 35 VARIANCE(ΣΡDY) - 371.25 EXPECTED RETURN (Y)- 7.5 ΣΡΥ) 19.27 V371.25 STANDARD DEVIATION = VVARIANCE

a) Expected return for A Expected return for B 12.75% 7.50% b) Standard Deviation for A 4.54% Standard Deviation for B 19.27%