Chapter 11, Problem 5QAP

Summary Introduction

Adequate information:

Probability in Recession $\left({\text{P}}_{\text{R}}\right)$ = 0.25

Probability in Normal $\left({\text{P}}_{\text{N}}\right)$ = 0.55

Probability in Boom $\left({\text{P}}_{\text{B}}\right)$ = 0.20

Return for Stock A in Recession $\left({\text{R}}_{\text{R}}\right)$ = 0.06

Return for Stock A in Normal $\left({\text{R}}_{\text{N}}\right)$ = 0.07

Return for Stock A in Boom $\left({\text{R}}_{\text{B}}\right)$ = 0.11

Return for Stock B in Recession $\left({\text{R}}_{\text{R}}\right)$ = -0.20

Return for Stock B in Normal $\left({\text{R}}_{\text{N}}\right)$ = 0.13

Return for Stock B in Boom $\left({\text{R}}_{\text{B}}\right)$ = 0.33

To compute: Expected return and standard deviation of Stocks A and B.

Introduction: Expected return refers to the return that is anticipated on the stock in the near future. The standard deviation of stock refers to the dispersion of the actual price from the average price.