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Consider the following information:
Calculate the expected return for each stock. (Do not round intermediate calculations. Enter your
answers as a percent rounded to 2 decimal places, e.g., 32.16.)
Calculate the standard deviation for each stock. (Do not round intermediate calculations. Enter
your answers as a percentrounded to 2 decimal places, e.g., 32.16.) Rate of Return If State
Occurs State of Probability of Economy State of Economy Stock A Stock B
Recession.20.08.15 Normal.50.11.14 Boom.30.16.31
Solution
A)
Expected return = 13.3%
B)
Expected return of A = Probability * ReturnEconomic ConditionProbabilityReturnExpected
returnRecession0.2 0.08 0.0160Normal0.5 0.11
0.0550Boom0.3 0.16 0.0480
0.12Expected return = 12%Expected return of B = Probability * ReturnEconomic
ConditionProbabilityReturnExpected returnRecession0.2 -0.15 -
0.0300Normal0.5 0.14 0.0700Boom0.3 0.31
0.0930 0.1330
Expected return = 13.3%
B)Srandard deviation of AEconomic ConditionProbabilityExpected returnActual
returnDeviation from expected returnSquaredVariance= Squared* ProbabilityRecession0.2
0.12 0.08 0.04 0.0016
0.00032Normal0.5 0.12 0.11 0.01 0.0001
0.00005Boom0.3 0.12 0.16 -
0.04 0.0016 0.00048Variance0.00085Standard deviation= Square root of
variance= 0.0291 =2.91%Srandard deviation of BEconomic ConditionProbabilityExpected
returnActual returnDeviation from expected returnSquaredVariance= Squared*
ProbabilityRecession0.2 0.13 -0.15 0.28
0.0801 0.01602Normal0.5 0.13 0.14
-0.01 0.0000 0.00002Boom0.3 0.13
0.31 -0.18 0.0313 0.00940Variance
0.02544Standard deviation= Square root of variance= 0.1595 =15.95%
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Consider the following informationCalculate the expected return f.pdf

  • 1. Consider the following information: Calculate the expected return for each stock. (Do not round intermediate calculations. Enter your answers as a percent rounded to 2 decimal places, e.g., 32.16.) Calculate the standard deviation for each stock. (Do not round intermediate calculations. Enter your answers as a percentrounded to 2 decimal places, e.g., 32.16.) Rate of Return If State Occurs State of Probability of Economy State of Economy Stock A Stock B Recession.20.08.15 Normal.50.11.14 Boom.30.16.31 Solution A) Expected return = 13.3% B) Expected return of A = Probability * ReturnEconomic ConditionProbabilityReturnExpected returnRecession0.2 0.08 0.0160Normal0.5 0.11 0.0550Boom0.3 0.16 0.0480 0.12Expected return = 12%Expected return of B = Probability * ReturnEconomic ConditionProbabilityReturnExpected returnRecession0.2 -0.15 - 0.0300Normal0.5 0.14 0.0700Boom0.3 0.31 0.0930 0.1330 Expected return = 13.3% B)Srandard deviation of AEconomic ConditionProbabilityExpected returnActual returnDeviation from expected returnSquaredVariance= Squared* ProbabilityRecession0.2 0.12 0.08 0.04 0.0016 0.00032Normal0.5 0.12 0.11 0.01 0.0001 0.00005Boom0.3 0.12 0.16 - 0.04 0.0016 0.00048Variance0.00085Standard deviation= Square root of variance= 0.0291 =2.91%Srandard deviation of BEconomic ConditionProbabilityExpected returnActual returnDeviation from expected returnSquaredVariance= Squared* ProbabilityRecession0.2 0.13 -0.15 0.28 0.0801 0.01602Normal0.5 0.13 0.14 -0.01 0.0000 0.00002Boom0.3 0.13 0.31 -0.18 0.0313 0.00940Variance 0.02544Standard deviation= Square root of variance= 0.1595 =15.95%