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?
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 ...
The solution explains the calculation of expected return and standard deviation of a stock