Question

1. What is the EXPECTED RETURN for Asset A and B?

2.What is the STANDARD DEVIATION for Asset A and B?

State of Economy Probability Asset A of State of Rate of Economy Return 0.3 0.13 0.5 0.06 0.2 -0.05 Asset B Rate of Return 0.08 0.05 -0.01 Boom Normal Recession

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Answer 1

Expected return=Sum(probability*return)
Standard deviation=Sqrt(Sum(probability*(return-expected return)^2))

Expected return:
A=0.3*0.13+0.5*0.06+0.2*(-0.05)=0.05900000

B=0.3*0.08+0.5*0.05+0.2*(-0.01)=0.04700000

Standard deviation:
A=sqrt(0.3*(0.13-0.059)^2+0.5*(0.06-0.059)^2+0.2*(-0.05-0.059)^2)=0.06236185

B=sqrt(0.3*(0.08-0.047)^2+0.5*(0.05-0.047)^2+0.2*(-0.01-0.047)^2)=0.03132092