Question

Returns on ABC, Inc. are forecast to be the following: State Probability Return Boom 0.25 30% Normal 0.65 15% Bust 0.10 -14% What is the standard deviation of this company’s stock? Returns on ABC, Inc. are forecast to be the following: State Probability Return Boom 0.25 30% Normal 0.65 15% Bust 0.10 -14% What is the standard deviation of this company’s stock? 11.82% 11.56% 11.32% 11.07% 10.83%

Answer 1

Standard deviation=11.82%

Step-by-step explanation:

Standard deviation is measure of the total risks of an investment. It measures the volatility in return of an investment as a result of both systematic and non-systematic risks. Non-systematic risk includes risk that are unique to a company like poor management, legal suit against the company .

Standard deviation is the sum of the squared deviation of the individual return from the mean return under different scenarios

Expected return (r) = (30% × 0.25 ) + (15% × 0.65) + (-14%× 0.10)=15.8%

Outcome (R- r )^2 × P

Boom (30%-15.8)^2× 0.25 = 50.05

Normal (15%-15.8)^2×0.65 = 0.47

Bust ( 13.6%- 15.8)^2 ×0.1= 89.10

139.63

Standard deviation =√139.63= 11.82%

Standard deviation=11.82%