Question

Blue Bell stock is expected to return 8.4 percent in a boom, 8.9 percent in a normal economy, and 9.2 percent in a recession. The probabilities of a boom, normal economy, and a recession are 6 percent, 92 percent, and 2 percent, respectively. What is the standard deviation of the returns on this stock.38 percent.55 percent.13 percent.42 percent.06 percent

Answer 1

Answer:

13%

Explanation:

The appropriate formula to use is as shown below:

Standard Deviation = $\sqrt{\frac{∑f(x-y^{2} )}{∑f}}$

Where ∑ is the summation symbol,

f is the frequency (in this sample, the probability expressed in decimal),

x is the expected return,

y is the mean return.

The formula for y, the mean return, is as follows:

y = $\frac{∑fx}{∑f}}$.

All computations are attached.

From the computation,

the mean return = 8.876%

the standard deviation of returns = 12.7377% = 13%