Question

out of You are thinking about investing your money in the Palestinian stock market. You have the following two stocks in mind: stock A and stock B. You know that the economy can either go in recession or it will boom. Being an optimistic investor, you believe the likelihood of observing an economic boom is sixty five observing an economic depression. You also know the following about your two stocks: State of the Probability RA Ro Economy Boom 10% -6% Recession 6% 30% Calculate the standard deviation for stock B? THE

Answer 1

For stock B:

Expected return = r = P_boom x R_{B, boom} + P_recession x R_{B, recession} = 65% x (-6%) + (1 - 65%) x 30% = 6.60%

Hence, Variance = P_boom x (R_{B, boom} - r)² + P_recession x (RB, recession - r)²  = 65% x (-6% - 6.60%)² + (1 - 65%) x (30% - 6.60%)² = 0.029484

Hence, standard deviation = Variance^1/2 = 0.029484^1/2 = 0.1717 = 17.17%