Question

Consider the following information: Rate of Return If State Occurs State of Economy Stock A Probability of State of Economy .20 .55 .25 Stock B - 18 .11 Recession Normal Boom .05 .08 .13 28 Calculate the expected return for each stock. (Do not round intermediate calculations. Enter your answers as a percent rounded to 2 decimal places, e.g., 32.16.) Expected return Stock A Stock B Calculate the standard deviation for each stock. (Do not round intermediate calculations. Enter your answers as a percent rounded to 2 decimal places, e.g., 32.16.) Standard deviation Stock A Stock B

Answer 1

Stock A
Scenario	Probability	Return%	=rate of return% * probability	Actual return -expected return(A)%	(A)^2* probability
Recession	0.2	5	1	-3.65	0.00026645
Normal	0.55	8	4.4	-0.65	2.32375E-05
Boom	0.25	13	3.25	4.35	0.000473063
	Expected return %=	sum of weighted return =	8.65	Sum=Variance Stock A=	0.00076
			Standard deviation of Stock A%	=(Variance)^(1/2)	2.76
Stock B
Scenario	Probability	Return%	=rate of return% * probability	Actual return -expected return(A)%	(B)^2* probability
Recession	0.2	-18	-3.6	-27.45	0.01507005
Normal	0.55	11	6.05	1.55	0.000132138
Boom	0.25	28	7	18.55	0.008602563
	Expected return %=	sum of weighted return =	9.45	Sum=Variance Stock B=	0.0238
			Standard deviation of Stock B%	=(Variance)^(1/2)	15.43