Question

(Expected rate of return and risk) Summerville Inc. is considering an investment in one of two common stocks. Given the informa standard deviation) and return of each? a. The expected rate of return for Stock A is 15%. (Round to two decimal places) The expected rate of return for Stock Bis 9.9%. (Round to two decimal places) b. The standard deviation for Stock Ais % (Round to two decimal places)

Answer 1

Answer

For Stock A
Probability Pi	Return Xi	Pi*Xi	(Xi-Xm)	Pi*(Xi-Xm)^2
0.25	12%	0.03	-3%	0.000225
0.5	15%	0.075	0%	0
0.25	18%	0.045	3%	0.000225
	Mean Return Xm=∑Pi*Xi	15%	Variance V=∑Pi*(Xi-Xm)^2	0.00045
			Standard Devition =√Variance	2.12%

For Stock B
Probability Pi	Return Xi	Pi*Xi	(Xi-Xm)	Pi*(Xi-Xm)^2
0.15	-4%	-0.006	-14%	0.00289815
0.35	6%	0.021	-4%	0.00053235
0.35	15%	0.0525	5%	0.00091035
0.15	21%	0.0315	11%	0.00184815
	Mean Return Xm=∑Pi*Xi	9.90%	Variance V=∑Pi*(Xi-Xm)^2	0.006189
			Standard Devition =√Variance	7.87%