The returns on the common stock of New Image Products are quite cyclical.In a boom economy,the stock is expected to return 32 percent in comparison to 14 percent in a normal economy and a negative 28 percent in a recessionary period.The probability of a recession is 25 percent while the probability of a boom is 20 percent.What is the standard deviation of the returns on this stock?

Question

Quizplus · Accepted Answer

E(r) = (0.20 × 0.32) + (0.55 × 0.14) + (0.25 × -0.28) = 0.071Var = 0.20 (0.32 - 0.071)² + 0.55 (0.14 - 0.071)² + 0.25 (-0.28 - 0.071)² = 0.045819Std dev = √0.045819 = 21.41 percent

The Returns on the Common Stock of New Image Products