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    Expected return and standard deviation of stocks

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    Based on the attached information, calculate the expected return and standard deviation for the two stocks.

    Probability of State of Economy Stock P Rate of Return Stock Q Rate of Return
    State of Economy
    Recession 0.15 0.04 -0.2
    Normal 0.75 0.08 0.2
    Boom 0.1 0.16 0.6

    © BrainMass Inc. brainmass.com June 3, 2020, 4:45 pm ad1c9bdddf
    https://brainmass.com/business/accounting/3040

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    The answer is attached in excel file 3040

    Recession 0.15 0.04 -0.2
    Normal 0.75 0.08 0.2
    Boom 0.1 0.16 0.6

    Expected return= Expected return=Σprobability*return
    Stock P =0.15*0.04+0.75*0.08+0.1*0.16= 0.082 or 8.20%
    Stock ...

    Solution Summary

    The solution shows steps to calculate the expected return and standard deviation of two stocks that have different returns in different states of nature- recession, normal, boom. The probabilities of the states of nature are used to calculate the expected return and standard deviation of stocks

    $2.19

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