Question

Problem 1 FIN300 Corp. believes the following probability distribution exists for its stock. What is the expected return and the standard deviation of the company's stock? State of the Econom Boom Normal Recession Probability of State Occurrin 0.30 0.50 0.20 Stock's Expected Return 25% 15% -5%

Answer 1

Expected Return = 0.3*25% + 0.5*15% + 0.2*-5%

= 14%

Calculation of Standard Deviation:

State	Prob.	Expected Return (X)	Mean	X-Mean	(x-Mean)2*Prob.
Boom	0.3	25%	14%	11%	36.3
Normal	0.5	15%	14%	1%	0.5
Recession	0.2	-5%	14%	-19%	72.2
					109

Standard Deviation = (109)^1/2
=10.44%