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