QUESTION 27 After studying the economy, you forecast that there is a 70% chance of a good economy next year and a 30% chance of a poor economy. If the economy is good, you estimate that a stock you have been following would have a 19% return. Likewise, if the economy is poor, you estimate a -7% return for that same stock. The risk-free rate is 4.3%. What is the standard deviation of the expected returns for this stock? (Answer to the nearest tenth of a percent, but do not use a percent sign). Probability Return Good Economy 70% 19% Poor Economy 30% -7% Risk-Free Rate = 4.3
| Stock | |||||
| Scenario | Probability | Return% | =rate of return% * probability | Actual return -expected return(A)% | (A)^2* probability |
| Good | 0.7 | 19 | 13.3 | 7.8 | 0.0042588 |
| Poor | 0.3 | -7 | -2.1 | -18.2 | 0.0099372 |
| Expected return %= | sum of weighted return = | 11.2 | Sum=Variance Stock= | 0.0142 | |
| Standard deviation of Stock% | =(Variance)^(1/2) | 11.9% | |||
QUESTION 27 After studying the economy, you forecast that there is a 70% chance of a...