Question

Consider the following information: Rate of Return if State Occurs State of Economy Recession Normal Boom Probability of State of Economy 0.20 0.60 0.20 Stock A 0.03 0.09 0.14 Stock B -0.19 0.17 0.33 Required: (a) Calculate the expected return for Stock A. (Do not round your intermediate calculations.) 9.15% (b) Calculate the expected return for Stock B. (Do not round your intermediate calculations.) ( (Click to select) ) (c) Calculate the standard deviation for Stock A. (Do not round your intermediate calculations.) | (Click to select) A Calculate the standard deviation for Stock B. (Do not round your intermediate calculations.) ( (Click to select) )

Answer 1

Computation of Expected return and standard deviation for Stock A Probability Return Probability * Return Expected return Deviation Deviation 2 Probability * Deviation 2 0.2 0.03 0.006 0.088 -0.058 0.003364 0.0006728 0.6 0.09 0.054 0.088 0.0024E-06 0.0000024 0.2 0.14 0.028 0.088 0.052 0.002704 0.0005408 0.088 0.001216 Expected return of stock A = Sum of (Probability * Return) = 0.088 Deviation = Return - Expected return Standard deviation of stock A = Square root of [Sum of Probability * Deviation 2] = Square root of [0.001216] = 0.034871192 = 0.0349 (Rounded) Computation of Expected return and standard deviation for Stock B Probability Return Probability * Return Expected return Deviation Deviation 2 Probability * Deviation2 0.2 -0.19 -0.038 0.13 -0.32 0.1024 0.02048 0.6 0.17 0.102 0.13 0.04 0.0016 0.00096 0.2 0.33 0.066 0.13 0.2 0.04 0.008 0.13 0.02944 Expected return of stock B = Sum of (Probability * Return) = 0.13 Deviation = Return - Expected return Standard deviation of stock B = Square root of [Sum of Probability * Deviation 2] = Square root of [0.02944] = 0.171580885 = 0.1716 (Rounded)