Kali's Ski Resort stock is quite cyclical.In a boom economy,the stock is expected to return 30 percent in comparison to 12 percent in a normal economy and a negative 20 percent in a recessionary period.The probability of a recession is 15 percent while it is 30 percent for a booming economy.The remainder of the time,the economy will be at normal levels.What is the standard deviation of the returns?

Question

Quizplus · Accepted Answer

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

Kali's Ski Resort Stock Is Quite Cyclical