19 Magee Inc.\'s manager believes that economic conditions during the next year

Question

19

Magee Inc.'s manager believes that economic conditions during the next year will be strong, normal, or weak, and she thinks that the firm's returns will have the probability distribution shown below. What's the standard deviation of the estimated returns? (Hint: Use the formula for the standard deviation of a population, not a sample.)

Select one:

a. 21.55%

b. 20.52%

c. 19.55%

d. 18.62%

e. 17.69%

Economic Conditions Table Economic
Conditions Prob. Return Strong 30% 32.0% Normal 40% 10.0% Weak 30% -16.0%

Explanation / Answer

Answer: d. 18.62%

Standard deviation=Square root of variance

=Square root of 346.56

=18.62%

Economic Prob. Return Conditions Expected return Deviation Square of deviations P*square of deviations Strong 30% 32.00% 9.600% 23.2 538.24 161.472 Normal 40% 10.00% 4.000% 1.2 1.44 0.576 Weak 30% -16.00% -4.800% -24.8 615.04 184.512 8.800% 346.56

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