Question

M UOLIUS [LU Consider the following information: Rate of Return if State Occurs SU Probability of State of Economy .20 Stock A State of Economy Recession Normal Boom Stock B .035 -40 .60 20 115 .290 .30 53 Requirement 1: Calculate the expected return for the two stocks. (Do not round intermediate calculations. Enter your answers as a percentage rounded to 2 decimal places (e.g., 32.16).) Expected return E(RA) E(RB) % Prev 1 of 3 Next >

Answer 1

Stock A Return State of economy probability Recession 0.20 Normal 0.60 Boom 0.20 Total Expected return Return-Expected Return variance prob*return Deviation Deviation^2d2*probability 0.035 0.007 -0.099 0.009801 0.0019602 0.115 0.069 -0.019 0.000361 0.00021660 0.290 0.058 0.156 0.024336 0.0048672 0.134 0.007044 Expected return Standard deviation 0.007044^(1/2) 0.134 0.083928541 13.40% 8.39% Stock B Return State of economy probability Recession 0.20 Normal 0.60 Boom 0.20 Total Expected return Return-Expected Return variance prob*return Deviation Deviation^2 d2*probability -0.40 -0.08 -0.534 0.285156 0.0570312 0.30 0.18 0.166 0.027556 0.01653360 0.53 0.106 0.396 0.156816 0.0313632 0.206 0.104928 Expected return Standard deviation 0.104928^(1/2) 0.206 0.323925917 20.60% 32.39%

Stock A Stock B Expected Return Standard Deviation 13.40% 8.39% 20.60% 32.39%