Question

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7. Calculate the Expected Return and Standard Deviation of the individual asset A and B presented below. ASSET A State Pr State Return in State Pr R(A) -15 % Pr*R Deviation Deviation Squared Deviation Sq *Pr 1 0.4 2 0.6 5% E(R)= Variance Asset A- sd asset A ASSET B State Pr State Return in State Pr*R Deviation Deviation Squared Deviation Sq *Pr State R(B) Pr 25% 0.4 1 15% 0.6 2 Variance Asset B= E(R) sd Asset B

Answer 1

Stock A State of economy probability deviation deviation sqaured deviation sq* probability Expected return Returns Return3% (Return x probability) 1.440000% 0.4 -15% -6,000% -12.000% 1 0.005760000 8.000% 0.640000% 0.6 3.000% 5% 2 0.00384000 Expected return -3.00% Variance 0.00960 Standard deviation = variance^0.5 9.80% Stock B deviation State of economy probability deviation sqaured deviation sq* probability Expected return Returns Return- 19% (Return x probability) 0.360000% 6.000% -4,000% 25% 10.000% 1 0.4 0.001440000 0.160000% 15% 9.000% 0.00096000 2 0.6 19.00% Expected return Variance 0.00240 Standard deviation variance^0.5 4.90%