# (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

**Type of Paper:** Question-Answer

**Academic Level:** Undergrad. (yrs 1-2)

**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 = 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 = Probability * (Return - Expected return of Stock A) ^{2}**

**Standard Deviation of Stock A = 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 = .........**