State of Probability of Economy State of Economy Stock A Stock B Recession .17 .

Question

State of Probability of Economy State of Economy Stock A Stock B Recession .17 .05 .21 Normal .62 .09 .08 Boom .21 .16 .25 Calculate the expected return for each stock. (Do not round intermediate calculations. Enter your answers as a percent rounded to 2 decimal places, e.g., 32.16.) Expected return Stock A % Stock B % Calculate the standard deviation for each stock. (Do not round intermediate calculations. Enter your answers as a percent rounded to 2 decimal places, e.g., 32.16.) Standard deviation Stock A % Stock B %

Explanation / Answer

Expected Return

Stock A = 0.17 * 5 + 0.62 * 9 + 0.21 * 16 = 9.79 %

Stock B = 0.17 * (-) 21 + 0.62 * 8 + 0.21 * 25

= (-) 3.57 + 4.96 + 5.25

   = 6.64 %

Conclusion:-

Expected return of stock A = 9.79 % and Expected return of stock B = 6.64 %

Standard Deviation of Stock A

Standard deviation of stock A = Under root of 62.1323 / 3

= Under root of 20.710766 (approx)

   = 4.55 % (approx)

Standard Deviation of Stock B

Standard deviation of stock B = Under root of 1102.9088 / 3

= Under root of 367.636

   = 19.17 % (approx)

Conclusion:-

standard deviation of stock A = 4.55 % and standard deviation of stock B = 19.17 %.

Return X = Return - Expected return X2 Recession 5 5 - 9.79 = (-) 4.79 22.9441 Normal 9 9 - 9.79 = (-) 0.79 0.6241 Boom 16 16 - 9.79 = 6.21 38.5641 Total 62.1323

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