State (i) Probability (p i ) Return (R i ) -------------------------------------
ID: 2720855 • Letter: S
Question
State (i) Probability (pi) Return (Ri)
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Normal .50 .25
Recession .35 .05
Depression ?? –.35
Calculate the expected return for the following stock? E(R) = pi Ri
State (i) Probability (pi) Return (Ri)
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Normal .50 .25
Recession .35 .05
Depression ?? –.35
A. 7% B. 8% C. 9% D. 10%Calculate the variance of the stock in Question 5 above. 2 = pi [Ri – E(Ri)]2
A. .0235 B. .0306 C. .0424 D. .0487Explanation / Answer
1) E(R)=0.50*0.25+0.35*0.05+0.15*(-0.35)=9%
Depression PROB=1-(0.50+0.35)=0.15
variance of the stock =0.50*(0.25-0.09)^2+0.35*(0.05-0.09)^2+0.15*(-0.35-0.09)^2=4.24% OR 0.0424
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