Question

RTF stock is expected to return 10.6 percent if the economy booms and only 4.2 percent if the economy goes into a recessionary period. The probability of a boom is 55 percent while the probability of a recession is 45 percent. What is the standard deviation of the returns on RTF stock?

Answer 1

3.16%

Step-by-step explanation:

Return Probability Expected return μ r - μ (r - μ)^2 P(r)*(r - μ)^2

10.60% 0.55 5.83% 2.88% 0.08% 0.05%

4.20% 0.45 1.89% -3.52% 0.12% 0.06%

Total Expected return = 7.72% Variance 0.10%

Variance = 0.10%

Standard deviation = √Variance

Standard deviation = √0.001

Standard deviation = 0.031622

Standard deviation = 3.16%

Thus, the standard deviation of the returns on RTF stock is 3.16%