Economic State Probability Return Fast Growth 25% 24% Slow growth 60% 9% Recession 15% -6% Compute...

Question

Question

Compute the standard deviation of the expected return given these three economic states, their likilihoods, and the potential returns:

business finance

Answer 1

Answer #1

Expected return=respective return*respective probability

=(0.25*24)+(0.6*9)+(0.15*-6)=10.5%

probability	Return	probability*(return-Expected return)^2
0.25	24	0.25*(24-10.5)^2=45.5625
0.6	9	0.6*(9-10.5)^2=1.35
0.15	-6	0.15*(-6-10.5)^2=40.8375
		Total=87.75%

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

which is equal to

=9.37%(Approx).

Answer 2

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