Economy of Economy Stock A Stock B Recession. 20.010 -.35 Normal. 55.090.25 Boom. 25.240.48

a. Calculate the expected return for the two stocks. (Do not round intermediate calculations and enter your answers as a percent rounded to 2 decimal places, e. g., 32.16.)

b. Calculate the standard deviation for the two stocks. (Do not round intermediate calculations and enter your answers as a percent rounded to 2 decimal places, e. g., 32.16.)

a. STOCK A

State of nature R (%) P ER R-ER R - ER2. P

Recession 0.010 0.20 0.002 - 0.1015 0.00206045

Normal 0.090 0.55 0.0495 - 0.0215 0.0002542375

Boom 0.240 0.25 0.06 0.1285 0.0041280625

ER 0.1115 Variance 0.00644275

STOCK B

State of nature R (%) P ER R - ER R - ER2. P

Recession - 0.35 0.20 - 0.07 - 0.5375 0.05778125

Normal 0.25 0.55 0.1375 0.0625 0. 0021484375

Boom 0.48 0.25 0.12 0.2925 0.021389062

ER 0.1875 Variance 0.08131875

Expected return of stock A = 0.1115 = 11.15%

Expected return of stock B = 0.1875 = 18.75%

b. Standard deviation of stock A = √0.00644275 = 0.0802

Standard deviation of stock B = √0.08131875 = 0.2852

Explanation:

In the first case, there is need to calculate the expected return of each stock by multiplying the return by probability.

In the second case, we need to obtain the variance. The square root of variance gives the standard deviation. Variance is calculated by deducting the expected return from the actual return, then, raised the difference by power 2 multiplied by probability.