A stock is expected to earn 27 percent in a boom economy and 13 percent in a nor

Question

A stock is expected to earn 27 percent in a boom economy and 13 percent in a normal economy. There is a 41 percent chance the economy will boom and a 59.0 percent chance the economy will be normal. What is the standard deviation of these returns?

6.89 Percent

7.92 Percent

8.04 Percent

8.70 Percent

A stock is expected to earn 27 percent in a boom economy and 13 percent in a normal economy. There is a 41 percent chance the economy will boom and a 59.0 percent chance the economy will be normal. What is the standard deviation of these returns?

Explanation / Answer

Expected return=Respective returns*respective probabililities

=(0.27*0.41)+(0.13*0.59)=18.74%

SD=[Total of Probability*(return-mean)^2/Total probability]^(1/2)

=6.89%(Approx)(A)

Probability Return Probability*(return-mean)^2 0.41 27 0.41*(27-18.74)^2=27.973316 0.59 13 0.59*(13-18.74)^2=19.439084 Total=47.4124%

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