b. Compute the expected return and risk for the following two scenarios: A B C 1 State of Economy Probability of State Expected Market Return 2 Fast growth 0.13 30% 3 Slow growth 0.33 15% 4 No growth 0.30 2% 5 Recession 0.20 -18% 6 Depression 0.04 -25% A B 1 State of Economy Probability of State Expected Market Return 2 Fast growth 0.15 40% 3 Slow growth 0.35 18 4 No growth 0.34 5 Recession 0.15 -20 6 Depression 0.01 -35
b. Compute the expected return and risk for the following two scenarios: A B C 1 State of Economy Probability of State Expected Market Return 2 Fast growth 0.13 30% 3 Slow growth 0.33 15% 4 No growth 0.30 2% 5 Recession 0.20 -18% 6 Depression 0.04 -25% A B 1 State of Economy Probability of State Expected Market Return 2 Fast growth 0.15 40% 3 Slow growth 0.35 18 4 No growth 0.34 5 Recession 0.15 -20 6 Depression 0.01 -35
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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Question
It's best to add columns for deviation, standard deviation, and squared deviation multiplied by probability.
Transcribed Image Text:The image presents two tables. Each table contains data used to compute the expected return and risk for different economic scenarios.
**Table 1:**
- **Column A (State of Economy):** Lists different economic states: Fast growth, Slow growth, No growth, Recession, Depression.
- **Column B (Probability of State):** Provides the probability of each economic state occurring:
- Fast growth: 0.13
- Slow growth: 0.33
- No growth: 0.30
- Recession: 0.20
- Depression: 0.04
- **Column C (Expected Market Return):** Shows the expected market return for each state:
- Fast growth: 30%
- Slow growth: 15%
- No growth: 2%
- Recession: -18%
- Depression: -25%
**Table 2:**
- **Column A (State of Economy):** Same as in Table 1.
- **Column B (Probability of State):** Updated probabilities for each economic state:
- Fast growth: 0.15
- Slow growth: 0.35
- No growth: 0.34
- Recession: 0.15
- Depression: 0.01
- **Column C (Expected Market Return):** Updated expected market returns:
- Fast growth: 40%
- Slow growth: 18%
- No growth: 4%
- Recession: -20%
- Depression: -35%
These tables are used to analyze and compare how different economic scenarios can impact expected market returns, helping in investment decision-making by forecasting potential risks and rewards.
Transcribed Image Text:**10-32 Spreadsheet Problem**
Build a spreadsheet that automatically computes the expected market return and risk for different assumptions about the state of the economy.
a. First, create a spreadsheet like the one shown below and compute the expected return and standard deviation.
| A | B | C |
|---------------------|----------------------|------------------------|
| **State of Economy**| **Probability of State** | **Expected Market Return** |
| Fast growth | 0.13 | 35% |
| Slow growth | 0.42 | 17% |
| No growth | 0.25 | 3% |
| Recession | 0.18 | -15% |
| Depression | 0.02 | -30% |
| | **Sum =** 1.00 | |
| | **Expected return =** | |
| | **Standard deviation =** | |
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