Barbara is considering investing in a stock and is aware that the return on that

Question

Barbara is considering investing in a stock and is aware that the return on that investment is particularly sensitive to how the economy is performing. Her analysis suggests that four states of the economy can affect the return on the investment. Using the table of returns and probabilities below, find

       -5.00%

a) What is hte expected return on Barbara's investment? (Round answer to 3 decimal places, e.g. 0.076)

b) What is the standard deviation of the return on Barbara's investment? (Round answer to 5 decimal places, e.g. 0.07680)

Explanation / Answer

Here is the answer

EXPECTED RETURN = 0.5 * 25 + 0.3 * 15 + 0.1 *10 - 0.1 *5 = 17.5% = 0.175

Variance=0.5*(0.25-0.175)^2 + 0.3*(0.15-0.175)^2 + 0.1*(0.1-0.175)^2 + 0.1*(-0.05-0.175)^2 =0.008625

STD = SQRT(0.008625) = 0.09287

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