You are a financial analyst, and you are tasked with calculating the expected return and standard deviation of returns for Kershaw Enterprises. Toward that end you are given the following data: · In an expanding economy Kershaw is expected to earn 5.30% · In a booming economy Kershaw is expected to earn 9.50%; · In a contracting economy Kershaw is expected to earn 3.50% · In a recession Kershaw is expected to earn -1.20%; · The probabilities for expansion, boom, contraction and recession are 20%, 25%, 35% and 20% respectively.
You are a financial analyst, and you are tasked with calculating the expected return and standard deviation of returns for Kershaw Enterprises. Toward that end you are given the following data: · In an expanding economy Kershaw is expected to earn 5.30% · In a booming economy Kershaw is expected to earn 9.50%; · In a contracting economy Kershaw is expected to earn 3.50% · In a recession Kershaw is expected to earn -1.20%; · The probabilities for expansion, boom, contraction and recession are 20%, 25%, 35% and 20% respectively.
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
You are a financial analyst, and you are tasked with calculating the expected return and standard deviation of returns for Kershaw Enterprises. Toward that end you are given the following data:
· In an expanding economy Kershaw is expected to earn 5.30%
· In a booming economy Kershaw is expected to earn 9.50%;
· In a contracting economy Kershaw is expected to earn 3.50%
· In a recession Kershaw is expected to earn -1.20%;
· The probabilities for expansion, boom, contraction and recession are 20%, 25%, 35% and 20% respectively.
Expert Solution
Step 1: Information provided as per the question:
| State of Economy | Probability (A) | Estimated return (B) |
| Expanding | 20.00% | 5.30% |
| Booming | 25.00% | 9.50% |
| Contracting | 35.00% | 3.50% |
| Recession | 20.00% | -1.20% |
Requirement:
Expected return =?
Standard deviation of returns =?
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