Expected Return and Standard Deviation
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Distribution of rates of return on stock is as follows:
State of Economy Probability of State Occurring Stock Return %
Depression 0.1 -4.5
Recession 0.2 4.4
Normal 0.5 12.0
Boom 0.2 20.7
a. What is expected return on stock?
b. What is the standard deviation of returns on the stock?
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Solution Summary
The solution explains the calculation of expected return and standard deviation of a stock. The probability of state occurring and stock returns are examined.
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a. The expected returns are the sum of the probability X the stock return.
Expected return = 0.1X-4.5% + 0.2 X 4.4% + 0.5 X 12.0% X 0.2 ...
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