1. Based on the following information calculate the expected return and standard deviation for two stocks: State of Economy Probability of State of Economy Rate of Return if State Occurs Stock A Stock B Recession .15 .04 −.17 Normal .55 .09 .12

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Question:

Based on the following information calculate the expected return and standard deviation for two stocks:

State of Economy                                    Recession    Normal     Boom

Probability of State of Economy                   .15             .55           0.30

Rate of Return if State Occurs                      

Stock A                                                            .04             .09            .17

Stock B                                                            -.17             .12             .27

The expected return of stock A is 10.65%

The expected return of stock B is 12.15%

The standard deviation of stock A is 4.5%

The standard deviation of stock B is 13.92%

Explanation:

The expected return of stock A is given by

Therefore, the expected return of stock A is 10.65%

The expected return of stock B is given by

Therefore, the expected return of stock B is 12.15%

The standard deviation of stock A is given byTherefore, the standard deviation of stock A is 4.5%

The standard deviation of stock B is given byTherefore, the standard deviation of stock B is 13.92%

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