The probability of total state is 1. Thus, probability of Recession is = 1 - probability of Boom - probability of Normal
= 1 - 0.25 - 0.40
= 0.35
Calculating the Expected Return, Variance and Standard Deviation:-
Prob (P) | Stock Return (C) (%) | Stock Return (T) (%) | (P)*(C) | (P)*(T) | Deviation [R-E(C)] | Deviation [R-E(T)] | [R-E(C)]^2 | {[R-E(C)]^2}*(P) | [R-E(T)]^2 | {[R-E(T)]^2}*(P) |
0.25 | 0.1600 | 0.2300 | 0.0400 | 0.0575 | 0.0655 | 0.1125 | 0.0043 | 0.0011 | 0.0127 | 0.0032 |
0.40 | 0.1100 | 0.1500 | 0.0440 | 0.0600 | 0.0155 | 0.0325 | 0.0002 | 0.0001 | 0.0011 | 0.0004 |
0.35 | 0.0300 | -0.0500 | 0.0105 | -0.0175 | -0.0645 | -0.1675 | 0.0042 | 0.0015 | 0.0281 | 0.0098 |
0.09 | 0.12 | 0.0026 | 0.0134 |
- Expected return for Stock C =
= 0.09
- Expected return for Stock T =
= 0.12
- Variance for Stock C =
= 0.0026
- Standard Deviation for Stock T =
= 0.1158
ignore the top part. need the expected return for stock C and stock T. also the...
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