Kurt's Adventures SA equity is quite cyclical.In a boom economy,the equity is expected to return 30% in comparison to 12% in a normal economy and a negative 20% in a recessionary period.The probability of a recession is 15%.There is a 30% chance of a boom economy.The remainder of the time,the economy will be at normal levels.What is the standard deviation of the returns on Kurt's Adventures SA?

Question

Quizplus · Accepted Answer

To find the standard deviation, first calculate the expected return: E(R) = (0.30 * 0.30) + (0.12 * 0.55) + (-0.20 * 0.15) = 0.099 or 9.9%. Then, calculate the variance: Var(R) = (0.30 - 0.099)^2 * 0.30 + (0.12 - 0.099)^2 * 0.55 + (-0.20 - 0.099)^2 * 0.15 = 0.02506. The standard deviation is the square root of the variance: √0.02506 = 0.1583 or 15.83%.

Kurt's Adventures SA Equity Is Quite Cyclical