Question

Use the following information on states of the economy and stock returns to calculate the standard deviation of returns. (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places.)

State of Economy Probability of State of Economy Security Return if State Occurs Recession .35 −5.50 % Normal .20 12.00 Boom .45 19.00

Answer 1

	Probability (P)	CF (Y)	(P * Y )	P * (Y -Average Return of Y)^2
Recession	35%	-5.5	-1.93	73.84
Normal	20%	12	2.40	1.77
Boom	45%	19	8.55	44.78
		TOTAL	9.03	120.39
Expected Return =		(P * Y)
		9.03%
VARIANCE =		P * (Y -Average Return of Y)^2
		120.39
Standard Deviation =		Square root of (P * (Y -Average Return of Y)^2)
		Square root of 120.39
		10.97