Question

Consider the following information: Rate of Return If State Occurs State of Probability of State of Economy Stock A Stock B Economy 17 Recession 05 - 21 Normal 62 09 08 Вoom 21 16 25 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 as a percent rounded to 2 decimal places, e.g. 32.16.) % Stock A expected return а. Stock B expected return b. Stock A standard deviation Stock B standard deviation

Answer 1

Stock A State of economy deviation probability deviation 2 deviationA 2x probability Expected return Returns Return-9.79% (Return x probability) 0.229441% Recession 0.85% -4.790% 0.000390050 0.05 0.17 Normal 0.62 5.58% -0.790% 0.006241% 0.09 0.00003869 Вoom 3.36% 6.210% 0.16 0.21 0.385641% 0.00080985 9.79% Expected return Variance 0.00124 Standard deviation = variance^0.5 3.52% Stock B State of economy deviation deviation^2 probability deviationA 2x probability Expected return Returns Return- 6.64% (Return x probability) 0.17 Recession -3.570% -27.640% 7.639696% -0.21 0.012987483 Normal 4.960% 1.360% 0.018496% 0.08 0.62 0.00011468 0.21 5.250% 18.360% 3.370896% Вoom 0.25 0.00707888 Expected return 6.64% Variance 0.02018 Standard deviation = variance^0.5 14.21% standard deviation Expected return Stock A 9.79% Stock A 3.52% Stock B 14.21% Stock B 6.64%