Question

Use the following information on states of the economy and stock returns to calculate the standard deviation of returns. Assume that all three states are equally likely. (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places.) State of Economy Security Return if State Occurs

Recession −9.00 %

Normal 16.00

Boom 25.00

Answer 1

Ans 14.38

STATE	Probability (P)	RETURN (Y)	(P * Y )	P * (Y -Average Return of Y)^2
RECESSION	33%	-9	-3.00	128.97
NORMAL	33%	16	5.33	9.47
BOOM	33%	25	8.33	68.45
		TOTAL	10.67	206.89
Expected Return =		(P * Y)
		10.67%
VARIANCE =		P * (Y -Average Return of Y)^2
		206.8889
Standard Deviation =		Square root of (P * (Y -Average Return of Y)^2)
		Square root of 206.8889
		14.38