Calculate the expected return and standard deviation for the following single stock:
State of economy | Probability of state of economy | Return if state of economy occurs |
Recession | .15 |
.02 |
Normal | .25 |
.08 |
Boom | .60 |
.12 |
The expected return and standard deviation, respectively, are:
9.8%, 2.95%
7.33%, 4.18%
9.50%, 3.57%
9.50%, 4.18%
7.33%, .1275%
Expected return=Respective return*Respective probability
=(0.15*2)+(0.25*8)+(0.6*12)
=9.5%
Probability | Return | Probability*(Return-Expected return)^2 |
0.15 | 2 | 0.15*(2-9.5)^2=8.4375 |
0.25 | 8 | 0.25*(8-9.5)^2=0.5625 |
0.6 | 12 | 0.6*(12-9.5)^2=3.75 |
Total=12.75% |
Standard deviation=[Total Probability*(Return-Expected return)^2/Total probability[^(1/2)
=(12.75)^(1/2)
=3.57%(Approx)
Hence the correct option is:
9.5%;3.57%
Calculate the expected return and standard deviation for the following single stock: State of economy Probability...
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