Chapter 11, Problem 6QAP

Summary Introduction

Adequate information:

Probability in Depression $\left({\text{P}}_{\text{D}}\right)$ = 0.15

Probability in Recession $\left({\text{P}}_{\text{R}}\right)$ = 0.30

Probability in Normal $\left({\text{P}}_{\text{N}}\right)$ = 0.45

Probability in Boom $\left({\text{P}}_{\text{B}}\right)$ = 0.10

Return for Stock in Depression $\left({\text{R}}_{\text{D}}\right)$ = -0.148

Return for Stock in Recession $\left({\text{R}}_{\text{R}}\right)$ = 0.031

Return for Stock in Normal $\left({\text{R}}_{\text{N}}\right)$ = 0.162

Return for Stock in Boom $\left({\text{R}}_{\text{B}}\right)$ = 0.348

To compute: Expected return and standard deviation of the stock.

Introduction: Expected return refers to the return that is anticipated on the stock in the near future. The standard deviation of stock refers to the dispersion of the actual price from the average price.