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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

#### Solution Preview

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=&#931;probability*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

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