Use the following information on states of the economy and stock returns to calc

Question

Use the following information on states of the economy and stock returns to calculate the standard deviation of returns. (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places. Omit the "%" sign in your response.)

Use the following information on states of the economy and stock returns to calculate the standard deviation of returns. (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places. Omit the "%" sign in your response.)

Explanation / Answer

Standard Deviation of return = (Variance)1/2

= (1.89)1/2

= 1.37

Notes:

1.   Expected return :

   Probability Security return Expected return

Recession 0.35 -9% - 3.15%

Normal 0.30 14% 4.2%

Boom 0.35 23% 8.05%

9.1%

2. variance of state =   Variance of recession + variance of normal + variance of boom

=  0.35(-0.09 - 0.091)2 + 0.30(0.14 - 0.091)2 + 0.35(0.23 - 0.091)2

= 0.35 * 0.032761 + 0.30* 0.002401 + 0.35 * 0.019321

= 0.01146635 + 0.0007203 + 0.00676235

= 1.89%

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