Question

Intro You've estimated the following expected retums for a stock, depending on the strength of the economy Probability Expected return 02 -0.02 State (s) Recession Normal Expansion 0.5 0,09 0.3 0.14 Attempt 1/1 for 10 pts. Part 1 What is the expected return for the stock? 3+ decimals Submit Part 2 Attempt 1/1 for 10 pts What is the standard deviation of returns for the stock? Type here to search O

Answer 1

A) What is the Expected return of the stock

Answer: 0.083 (or 8.3%)

B) What is the standard deviation of returns of the stock

Answer: 0.0558659 (or 5.58%)

Working

Expected return of stocks

Formula for calculation expected return is as follows

Expected return of stock            = Total of (probability * return)

Expected return of stock      = (0.2* -0.02) + (0.5 * 0.09) + (0.3 * 0.14)

                                                = -0.004 + 0.045 + 0.042

                                                = 0.083

The standard Deviation of stock

Formula for calculating standard deviation of Stock is as follows

Standard Deviation (SD) = P(x – T)2

Where,

P = Probability

x̅ = Expected return of the stock

X = Return on investment of the stock

Standard deviation for stock

For Calculation we need to use the expected return calculated above (i.e. expected return of stock (x̅) = 0.083)

P	X	(X - x̅)	P(X - x̅)2
(I)	(II)	(III)	(IV) = (I) * (III)2
Workings	Answer	Workings	Answer
0.2	-0.02	(-0.02 - 0.083)	-0.103	0.2 * (-0.103)2	0.00212180
0.5	0.09	(0.09 - 0.083)	0.007	0.5 * (0.007)2	0.00002450
0.3	0.14	(0.14 - 0.083)	0.057	0.3 * (0.057)2	0.00097470
ΣΡ(x – x)2	0.00312100