You have estimated the following probability distributions ofexpected future ret
ID: 2770984 • Letter: Y
Question
You have estimated the following probability distributions ofexpected future returns for stock X and Y: Stock X Probability Return 0.1 -10% 0.2 10% 0.4 15% 0.2 20% 0.1 40% Stock Y Probability Return 0.2 2% 0.2 7% 0.3 12% 0.2 15% 0.1 16% a) What is the expected rate of return for stock x? Stocky? b) What is the standard deviation of expected returns forstock x? For stock y? c)Which stock would you consider to be riskier? why? You have estimated the following probability distributions ofexpected future returns for stock X and Y: Stock X Probability Return 0.1 -10% 0.2 10% 0.4 15% 0.2 20% 0.1 40% Stock Y Probability Return 0.2 2% 0.2 7% 0.3 12% 0.2 15% 0.1 16% a) What is the expected rate of return for stock x? Stocky? b) What is the standard deviation of expected returns forstock x? For stock y? c)Which stock would you consider to be riskier? why?Explanation / Answer
a) expected return of stock X = 0.1 *(-10%) + 0.2 *10% + 0.4 *15%+0.2 *20% +0.1*40%=15% expected return of stock Y = 0.2 *2% +0.2*7%+ 0.3 *12%+0.2*15% +0.1*16%= 10%b) variance of stock X = 0.1 (15+10)^2 + 0.2 (15-10)^2+ 0.4(15-15)^2 +0.2 (15-20)^2 +0.1 (15-40)^2= 135 standard deviation of stock X = square rootof 135 = 11.62% variance of stock Y = 0.2 *(10-2)^2 +0.2(10-7)^2 +0.3 (10-12)^2 +0.2 (10-15)^2 +0.1 (10-16)^2 =24.4 standard deviation of stock Y = square rootof 24.4 =4.94 % c) stock X is riskier because it has higher standard deviation(which is a measuer of total risk)
Related Questions
Hire Me For All Your Tutoring Needs
Integrity-first tutoring: clear explanations, guidance, and feedback.
Drop an Email at
drjack9650@gmail.com
drjack9650@gmail.com
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.