Question

What is the expected return and standard deviation for the following stock?

State of Economy	Probability of State of Economy	Rate of Return if State Occurs
Boom	.06			−.06
Normal	.74			.07
Recession	.20			.18

	A.	8.42 percent; 5.69 percent
	B.	8.42 percent; 5.74 percent
	C.	8.53 percent; 5.74 percent
	D.	8.53 percent; 5.69 percent

Please write out by hand/type not in excel

Answer 1

Expected return=Respective return*Respective probability

=(0.06*-6)+(0.74*7)+(0.2*18)=8.42%

probability	Return	probability*(Return-Expected Return)^2
0.06	-6	0.06*(-6-8.42)^2=12.476184
0.74	7	0.74*(7-8.42)^2=1.492136
0.2	18	0.2*(18-8.42)^2=18.35528
		Total=32.3236%

Standard deviation=[Total probability*(Return-Expected Return)^2/Total probability]^(1/2)

=5.69%(Approx).

Hence the correct option is A.