Week 4
. Expected Returns and Deviation Complete Problems 1, 2, and 3 from the Questions and Problems section of Chapter 11 (shown below). Remember to complete all parts of the questions, and report the results of your analysis. Respond to at least two of your classmates’ posts outside of your own thread.
a. Use the following information on states of the economy and stock returns to calculate the expected return for Dingaling Telephone. State of Economy
Recession
Normal
Boom Probability of State of the Economy
.30
.40
.30 Security Return if State Occurs
8%
13
23 Using the information in the previous question, calculate the standard deviation of returns. Repeat Questions 1 & 2 assuming that all three states are equally likely.
1. Expected Return: =.3(­8%) + .4(13%) + .3(23%) =.3(­.08) + .4(.13) + .3(.23) =.3(­.08) + .4(.13) + .3(.23) =.3(­.08) + .4(.13) + .3(.23) =­.024 + .052 + .069 = .097 of 9.70%
2. Standard Deviation: =.3(­.08 ­ .0970) ^2 + .4(.13­.0970) ^2 +.3(.23 ­ .0970) ^2
=.3(­.177) ^2 + .4(.033) ^2 +.3(.133) ^2
=.0093987 + .0004356 + .0053067 = .015141^.5 = .1230
=12.30%
3. Expected Returns:
= 1/3(­8%) + 1/3(13%) + 1/3(23%)
=.333(­.08) + .333(.13) + .333(.23)
= ­.02664 + .04329 + .07659= .09324 =9.33% 4.Deviations:
=.333(­.08 ­ .0933) ^2 + .333(.13 ­ .0933) ^2 + .333(.23 ­ .0933) ^2
=.333(­.0133) ^2 + .333(.0367) ^2 + .333 (.1367) ^2
=.333(.0001267689) + .333(.00134689) + .333 (.01868689)
=.01669 = .12918 =12.92%

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