George is considering an investment in Parson Inc. and has gathered th

George is considering an investment in Parson Inc. and has gathered the information in the following table. What is the expected standard deviation for a share of the firm’s stock?

State of the Economy Probability of the
State Conditional Expected Return
Parson Inc.
Recession .25 -20%
Steady .60 10%
Boom .15 35

A) 17.46%
B) 22.48
C) 27.54%
D) 31.62%

ANSWER

Answer: A
Explanation: A) Standard deviation = Σ[(rs – E(r))2 ∗ probs]1/2
= [(-20% – 6.25%)2 ∗ .25 + (10% – 6.25%)2 ∗ .60 + (35% – 6.25%)2 ∗ .15]1/2 = 17.46%.