P13-7 Calculating Returns and Standard Deviations [LO1] Consider the following i

Question

P13-7 Calculating Returns and Standard Deviations [LO1]

Consider the following information:

Calculate the expected return for Stock A. (Do not round your intermediate calculations.)

8.80%

8.62%

9.15%

9.24%

8.69%

Calculate the expected return for Stock B. (Do not round your intermediate calculations.)

13.83%

13.30%

10.00%

12.64%

13.96%

Calculate the standard deviation for Stock A. (Do not round your intermediate calculations.)

4.21%

4.42%

4.00%

2.98%

4.38%

Calculate the standard deviation for Stock B. (Do not round your intermediate calculations.)

17.67%

16.79%

12.49%

18.38%

18.55%

Consider the following information:

Explanation / Answer

Expected return is the weighted average of individual returns

A.

Stock A:

Expected return = 0.2*0.04 + 0.5*0.07 + 0.3*0.15 = 0.0880 = 8.80%

B.

Stock B:

Expected return = 0.2*-0.17 + 0.5*0.13 + 0.3*0.34 = 0.1330 = 13.30%

C.

Standard deviation is the square root of sum of squared deviations from the mean times the individual probability

Stock A:

Std dev = (0.2*(0.088-0.04)^2 + 0.5*(0.088-0.07)^2 + 0.3*(0.088-0.15)^2)^(1/2) = 4.21%

Stock B:

Std dev = (0.2*(0.133+0.17)^2 + 0.5*(0.133-0.13)^2 + 0.3*(0.133-0.34)^2)^(1/2) = 17.67%

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