Part 1) Expected return = Probability*ABC Inc return = (0.25*0.15)+(0.5*0.08)+(0.15*0.04)+(0.1*-0.03) = 0.0375+0.04+0.06-0.003 = 0.0805
Part 2)
State | Probability | Return | Expected return (Probability*Return) | Expected return-ΣExpected return | (Expected return-ΣExpected return)^2 | Probability*(Expected return-ΣExpected return)^2 |
Boom | 0.25 | 0.15 | 0.0375 | -0.0430 | 0.00184900 | 0.0004622500 |
Normal | 0.50 | 0.08 | 0.0400 | -0.0405 | 0.00164025 | 0.0008201250 |
Slowdown | 0.15 | 0.04 | 0.0060 | -0.0745 | 0.00555025 | 0.0008325375 |
Recession | 0.10 | -0.03 | -0.0030 | -0.0835 | 0.00697225 | 0.0006972250 |
0.0805 | 0.01601175 | 0.0028121375 |
Variance = Σ{Probability*(Expected return-ΣExpected return)^2} = 0.0028121375
Part 3)
Standard deviation = Square root of (Variance) = Square root of (0.0028121375) = 0.0530295908 or 5.3%
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