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

State Of economy Probability=P Return Stock A=Ra Return Stock B=Rb =P*Ra =P*Rb Expected Return Stock A =Rma Expected Return Stock B =Rmb =P*(Ra-Rma)^2 =P*(Rb-Rmb)^2 Recession                       0.17                     0.05                (0.21)             0.0085           (0.0357)            0.0979           0.0664              0.00039          0.01299 Normal                       0.62                     0.09                  0.08             0.0558             0.0496            0.0979           0.0664              0.00004          0.00011 Boom                       0.21                     0.16                  0.25             0.0336             0.0525            0.0979           0.0664              0.00081          0.00708 Total =             0.0979             0.0664           0.001239       0.020181 Stock A Stock B Expected Return 9.790% 6.640% Variance =              0.001239            0.020181 Standard Deviation =Sq Root Variance= 3.52% 14.21%

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