Use the following information on states of the economy and stock returns to calc
ID: 2778309 • Letter: U
Question
Use the following information on states of the economy and stock returns to calculate the standard deviation of returns. (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places. Omit the "%" sign in your response.)
Use the following information on states of the economy and stock returns to calculate the standard deviation of returns. (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places. Omit the "%" sign in your response.)
Explanation / Answer
Standard Deviation of return = (Variance)1/2
= (1.89)1/2
= 1.37
Notes:
1. Expected return :
Probability Security return Expected return
Recession 0.35 -9% - 3.15%
Normal 0.30 14% 4.2%
Boom 0.35 23% 8.05%
9.1%
2. variance of state = Variance of recession + variance of normal + variance of boom
= 0.35(-0.09 - 0.091)2 + 0.30(0.14 - 0.091)2 + 0.35(0.23 - 0.091)2
= 0.35 * 0.032761 + 0.30* 0.002401 + 0.35 * 0.019321
= 0.01146635 + 0.0007203 + 0.00676235
= 1.89%