Summerville Inc. is considering an investment in one of two common stocks. Given

Question

Summerville Inc. is considering an investment in one of two common stocks. Given the information in the popup? window:

A- What is The standard deviation for Stock A ? ?(Round to two decimal? places)

B- What is The standard deviation for Stock B ? ?(Round to two decimal? places)

1 Data Table COMMON STOCK A COMMON STOCK B PROBABILITY 0.30 0.40 0.30 RETURN 10% 16% 20% PROBABILITY 0.15 0.35 0.35 0.15 RETURN 5% 5% 16% 21% (Click on the icon located on the top-right corner of the data table above in order to copy its contents into a spreadsheet.) Print Done

Explanation / Answer

(A) - The standard deviation for Stock A

Expected Return = [10 x 0.30] + [16% x 0.40] + [20% x 0.30] = 15.40%

Variance

= [(10 – 15.40)2 x 0.30] + [(16 – 15.40)2 x 0.40] + [(20 – 15.40)2 x 0.30]

= 8.75 + 0.14 + 6.35

= 15.24

Therefore, Standard Deviation = Square Root of (15.24) = 3.90%

(B) - The standard deviation for Stock B

Expected Return = [-5% x 0.15] + [6% x 0.35] + [16% x 0.35] + [21% x 0.35]

=10.10%

Variance

= [(-5 – 10.10)2 x 0.15] + [(6 – 10.10)2 x 0.35] + [(16 – 10.10)2 x 0.35] + [(21 – 10.10)2 x 0.15]

= 34.20 + 5.88 + 12.18 + 17.82

= 70.09

Therefore, Standard Deviation = Square Root of (70.09) = 8.37%

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