Question

If the economy booms, Meyer&Co. stock will have a return of 20.4 percent. If the economy goes into a recession, the stock will have a loss of 12.7 percent. The probability of a boom is 67 percent while the probability of a recession is 33 percent. What is the standard deviation of the returns on the stock?

Answer 1

Answer:

The standard deviation of the returns on the stock is 15.56%(Approx).

Explanation:

Expected Return=Respective return*Respective probability

=(20.4*0.67)+(-12.7*0.33)=9.477%

probability Return probability*(Return-Expected Return)^2

0.67          20.4 0.67*(20.4-9.477)^2=79.93899243

0.33          -12.7 0.33*(-12.7-9.477)^2=162.3003786

Total=242.239371%

Standard deviation=[Total probability*(Return-Expected Return)^2/Total probability]^(1/2)

=15.56%(Approx).