You have given the following forecasts for the economy and Stock A: (1)the probability of having a recession next year is 30.0%, a normal economy is 55.0%, and an expansion is 15.0%, and (2)the price of Stock A will be $9 if the economy is in recession, $15 if the economy is normal, and $18 if the economy is in expansion.What is the ex ante standard deviation of Stock A's returns if it is currently selling for $12?
A)7.1719%
B)26.7804%
C)29.4219%
D)54.2419%

Question

Quizplus · Accepted Answer

To find the ex ante standard deviation, first calculate the expected return using the probabilities and stock prices for each economic state. Then, calculate the variance by finding the squared deviations of each return from the expected return, weighted by their probabilities. Finally, take the square root of the variance to get the standard deviation. The calculations lead to a standard deviation of approximately 26.7804%.

You Have Given the Following Forecasts for the Economy and Stock