# (SOLVED) Stock A and B have the following probability distributions of returns - Calculate the expected returns for each stock. Calculate the standard deviation for each stock.

Discipline: Finance

Paper Format: APA

Pages: 1 Words: 292

Question

Stock A and B have the following probability distributions of returns -

 Probability Return of stock A Return of stock B 0.5 - 3.5% 22% 0.2 10% 12% 0.3 15% 3%

a) Calculate the expected returns for each stock.

b) Calculate the standard deviation for each stock.

c) If you create a portfolio that contains 40% of stock A and 60% of stock B, what will be the expected return of the portfolio?

d) According to your calculation which stock has a higher risk? Why should investor choose that

Expert Solution Preview

Expected return of Stock A = $\sum_{}^{}$Probability * Return

Expected return of Stock A = 0.5 * (-3.5%) + 0.2 * 10% + 0.3 * 15%

Expected return of Stock A = 4.75%

Standard Deviation of Stock A = $\sqrt{\sum }$Probability * (Return - Expected return of Stock A)2

Standard Deviation of Stock A = $\sqrt{ }$0.5 * (-3.5% - 4.75%)2 + 0.2 * (10% - 4.75%)2 + 0.3 * (15% - 4.75%)2

Standard Deviation of Stock A = 8.43%

Expected return of Stock B = .........