Question

Consider the following information:

  

		Rate of Return if State Occurs
State of Economy	Probability of State of Economy	Stock A	Stock B
Recession	0.20	0.03	-0.19
Normal	0.70	0.08	0.15
Boom	0.10	0.12	0.31

  

Required:

  

Given that the expected return for Stock B is 9.800%, calculate the standard deviation for Stock B. (Do not round your intermediate calculations.)

Answer 1

Calculation of standard deviation:
State of Economy	Probability(a)	Return(%)	(return- expected return)	(return- expected return)^2 (b)	(a*b)
Recession	0.2	-19	-28.8	829.44	165.888
Normal	0.7	15	5.2	27.04	18.928
Boom	0.1	31	21.2	449.44	44.944
					229.76
Standard Deviation= (229.76)^(1/2)= 15.16
Standard Deviation of stock B is 15.16%