Question

Consider the following information: Rate of Return If State Occurs State of Economy Recession Normal Boom Probability of State of Economy Stock B 21 Stock A .06 .09 14 58 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

State of Economy	Probability of Economy(X)	Stock A	Stock B
recession	0.21	6.00%	-21.00%
normal	0.58	9.00%	8%
boom	0.21	14%	25.00%
Expected return E(X)=sum of(x*P(X))		9.42%	5.48%
E(X^2)		0.00957	0.026098
Variance=E(X^2)-E(X)^2		0.00069636	0.02309496
Standard deviation=sqrt(Variance)		2.64%	15.20%