Question

- 10.0 2. Consider the two assets A and B for which returns (%) under different conditions of economy are given as below. Find the expected return and risk (as measured by standard deviation of return) of each asset. Returns Condition of Economy Prob. Stock A Stock B Recession 0.10 -18.0 Below avg. 0.20 14.0 2.0 Average 0.40 12.0 8.0 Above avg. 0.20 24.0 12.0 Boom 30.0 18.0 1.00 0.10

Answer 1

Calculation of Expected Returns and standard deviation of each stock
		Stock A		Stock B		Standard Deviation
Economy	Probability	Returns	Expected Returns	Returns	Expected Returns	Stock A	Stock B
	x	a	a*x	b	b*x	x{(a-∑x)^2}	x(b-∑b)^2
Recession	0.1	-18	-1.80	-10	-1	78.40	28.22
below avg	0.2	-4	-0.80	2	0.4	39.20	4.61
average	0.4	12	4.80	8	3.2	1.60	0.58
above avg	0.2	24	4.80	12	2.4	39.20	5.41
boom	0.1	30	3.00	18	1.8	40.00	12.54
Expected Return		∑x	10.00	∑b	6.8
					∑	198.40	51.36
Standard deviation						(198.4)^(1/2)	(51.36)^(1/2)
					=	14.09	7.17