Question

Suppose that price of AAA stock at the end of next year depends on the state of the economy. The economy can have three states with the supplied probabilities and prices. What is the standard deviation of AAA’s returns if you purchase AAA today for $100? Also assume that AAA will pay a dividend of $10 at the end of the year. Enter your answer as a percent without the % sign. Round your final answer to 2 decimals.

	Expansion	Stable	Recession
Probability	.25	.5	.25
Price in one year	$130	$100	$80

Answer 1

Date: JU Calculation of Standard Deuiation of Return's 1st we will Calculate Return Return - Dividend & Share Price at - Purchase x 100 Paid at year and year end brice Purchase price of share Εκροηλ.en omslan Return = $ 10 $ 130 - $100 x 100 $ 100 = 90/ Stable Return = $10 t $100 - 1100 x 100 = 10.7 100 Recessian Return = $10 + $80 - $100 $ 100 = - 10 %

Now Praledeility Return line I Return (ime) (x) dx= x-1 (=20-50 (dac² CP .25 27.50 Expaniam Stable Recessian 40 lo 189.0625 .so 3.1250 - 2.50 -22.50 25 -10 126.5625 Expected Return (56) - 12.500 1.25x40+.5x10 + 25 (-10) Variance (E dpdx?) - 318.75 (ep xx) i Standard . V Variance - /318.75 = 17.85 Deviation (Rounded off to a decimals) Standard Deviation of Return's is 17.85