Question

The following information is about two different shares of stock:

State of the World	Probability of that state	Return on Asset A	Return on Asset B
X	.4	.1	.08
Y	.5	.12	.13
Z	.1	.16	.18

a. (10 points) What are the expected returns on Assets A and B?

b. (15 points) What are the expected standard deviations on Assets A and B?

Answer 1

D2 - A E : X fc =A2-$C$6 B C D Probability Expecte return [(P(r)] [rxP(r)= ] r-u 0.40 4.00% -1.60% 0.50 6.00% 0.40% 1 Asset A 10% 12% (r-u)^2 0.000256 0.000016 P(r)*(r-u)^2 0.000102 0.000008 3 16% 0.10 1.60% 4.40% 0.001936 0.000194 Expected return 11.60% 0.000304|| Variance (012) Standard deviation (0) 1.74% Asset B 8% 13% Probability Expecte return [(P(r)] [rxP(r)=u] 0.40 3.20% 0.50 6.50% r-u -3.50% 1.50% (r-u)^2 0.001225 0.000225 P(r)x(r-u)^2 0.000490 0.000113 12 18% 0.10 1.80% 6.50% 0.004225 0.000423 14 15 Expected return 16 11.50% 0.001025 Variance (012) Standard deviation (0) 3.20%

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