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 Boom 0.4 25.00% Good 0.3 15.00% Level 0.2 10.00% Slump 0.1 -5.00% What is the expected return on Barbara’s investment? (Round answer to 3 decimal places, e.g. 0.076.) What is the standard deviation of the return on Barbara's investment? (Round intermediate calculations and answer to 5 decimal places, e.g. 0.07680.)

Explanation / Answer

The expetced return on the investment is 0.4*0.25 + 0.3*0.15 + 0.2*0.10 + 0.1*-0.05 = 0.16 = 16%

The standard deviation is calculated as shown in the table:

Standard deviation = 9.17%

Economy Prob P Returns R R - E ( R ) [R - E ( R )]^2 [R - E ( R )]^2 * P Boom 0.4 0.25 0.09 0.0081 0.00324 Good 0.3 0.15 -0.01 0.0001 3E-05 Level 0.2 0.1 -0.06 0.0036 0.00072 Slump 0.1 -0.05 -0.21 0.0441 0.00441 Expected return E ( R ) 0.16 Variance 0.0084 Std. deviation 9.17%

Related Questions

Navigate

• Browse (All)
• Browse B
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.