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

Probability

Return

Boom

0.2

25.00%

Good

0.2

15.00%

Level

0.1

10.00%

Slump

0.5

-5.00%

What is the expected return on Barbara

  

     

Probability

     

Return

   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

Explanation / Answer

EXPECTED RETURN = 0.2 * 25 + 0.2 * 15 + 0.1 *10 - 0.5 *5 = 6.5% = 0.065 or 6.5%

Variance=0.2*(0.25-0.065)^2 + 0.2*(0.15-0.065)^2 + 0.1*(0.1-0.065)^2 + 0.5*(-0.05-0.065)^2 =0.015025

STD = SQRT(0.015025) = 0.122577 or 12.2577%

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