Question

Problem 11-7 Calculating Returns and Standard Deviations [LO 1] Consider the following information: Rate of Return if State Occurs Probability of State – of Economy Stock B State of Economy Recession Normal Boom Stock A 045 .125 310 -16 Requirement 1: Calculate the expected return for the two stocks. (Do not round intermediate calculations. Enter your answers as a percentage rounded to 2 decimal places (e.g., 32.16).) Expected return E(RA) E(R) Requirement 2: Calculate the standard deviation for the two stocks. (Do not round intermediate calculations. Enter your answers as a percentage rounded to 2 decimal places (e.g., 32.16).) Standard deviation OA

Answer 1

deviation Stock A State of economy Returns probability deviation^2 deviation ^2x probability Return-13.70% Recession Normal Boom 0.045 0.125 0.310 Expected return 0.22 0.62 0.16 Expected return (Return x probability) 0.99% 7.75% 4.96% 13.70% -9.200% -1.200% 17.300% 0.846400% 0.014400% 2.992900% 0.001862080 0.00008928 0.00478864 Variance Standard deviation = variance10.5 0.00674 8.21% deviation Stock B State of economy Returns probability Return-19.40% deviation^2 deviation ^2x probability Recession Normal Boom 0.22 0.62 -0.42 0.32 0.55 Expected return Expected return (Return x probability) -9.240% 19.840% 8.800% 19.40% -61.400% 12.600% 35.600% 37.699600% 1.587600% 12.673600% 0.082939120 0.00984312 0.02027776 0.16 Variance Standard deviation = variance10. 5 0.11306 3.62% 3 Stock A Stock B Expected return 13.70% 19.40% Stock A Stock B standard deviation 8.21% 33.62%