(SOLVED) Stock A and B have the following probability distributions of returns - Calculate the expected returns for each stock. Calculate the standard deviation for each stock.

Discipline: Finance

Type of Paper: Question-Answer

Academic Level: Undergrad. (yrs 1-2)

Paper Format: APA

Pages: 1 Words: 292

Question

Stock A and B have the following probability distributions of returns -

Probability
Return of stock A
Return of stock B
0.5
- 3.5%
22%
0.2
10%
12%
0.3
15%
3%


a) Calculate the expected returns for each stock.


b) Calculate the standard deviation for each stock.


c) If you create a portfolio that contains 40% of stock A and 60% of stock B, what will be the expected return of the portfolio?


d) According to your calculation which stock has a higher risk? Why should investor choose that


Expert Solution Preview


Expected return of Stock A = \sum_{}^{}Probability * Return


Expected return of Stock A = 0.5 * (-3.5%) + 0.2 * 10% + 0.3 * 15%


Expected return of Stock A = 4.75%


Standard Deviation of Stock A = ΣProbability * (Return - Expected return of Stock A)2


Standard Deviation of Stock A = \sqrt{ }0.5 * (-3.5% - 4.75%)2 + 0.2 * (10% - 4.75%)2 + 0.3 * (15% - 4.75%)2


Standard Deviation of Stock A = 8.43%


Expected return of Stock B = .........