Reference no: EM132911444

We know the following expected returns for stocks A and B, given different states of the economy:

State (s)              Probability            E(rA,s)                    E(rB,s)

Recession             0.2                     -0.03                     0.04

Normal                 0.5                     0.12                      0.07

Expansion             0.3                      0.2                       0.11

Note: If you can, it is much faster to solve these problems in a spreadsheet. However, the answer cannot be had simply by using the built-in AVERAGE() or STDEV() functions. If you are somewhat familiar with Excel, you might look into the SUMPRODUCT() function which is widely used to calculate weighted sums.

Problem 1: What is the expected return for stock A?

Problem 2: What is the expected return for stock B?

Problem 3: What is the standard deviation of returns for stock A?

Problem 4: What is the standard deviation of returns for stock B?