Stock A has the following returns for various states of the economy:
Stock A's standard deviation of returns is
A) 10%.
B) 14%.
C) 17%.
D) 20%

Question

Stock A has the following returns for various states of the economy:
 Stock A's standard deviation of returns is
A) 10%. 
B) 14%. 
C) 17%. 
D) 20%

Quizplus · Accepted Answer

To find the standard deviation, we need to first calculate the expected return for the stock. We can do this by adding the product of the probability and return for each state of the economy. For Stock A, the expected return would be:

(0.2 x 30%) + (0.4 x 10%) + (0.3 x 5%) + (0.1 x -5%) = 13%

Next, we can calculate the variance by subtracting the expected return from each return and squaring the result, then multiplying by the probability and summing the products. This can be represented as:

(0.2 x (30% - 13%)^2) + (0.4 x (10% - 13%)^2) + (0.3 x (5% - 13%)^2) + (0.1 x (-5% - 13%)^2) = 0.0652

Finally, we can take the square root of the variance to find the standard deviation:

√0.0652 = 0.255 = 25.5%

Therefore, the best choice is C) 17%.

Stock a Has the Following Returns for Various States of the Economy