You have estimated the following probability distributions ofexpected

QUESTION

You have estimated the following probability distributions ofexpected future returns for stock X and Y:Stock XProbability Return0.1 -10%0.2
a)expected return of stock X = 0.1 *(-10%) 0.2 *10% 0.4 *15% 0.2 *20% 0.1*40%=15%expected return of stock Y = 0.2 *2% 0.2*7% 0.3 *12% 0.2*15% 0.1*16%= 10% b) variance of stock X = 0.1 (15 10)^2 0.2 (15-10)^2 0.4(15-15)^2 0.2 (15-20)^2 0.1 (15-40)^2= 135 standard deviation of stock X = square rootof 135 = 11.62% variance of stock Y = 0.2

*(10-2)^2 0.2(10-7)^2 0.3 (10-12)^2 0.2 (10-15)^2 0.1 (10-16)^2 =24.4 standard deviation of stock Y = square rootof 24.4 =4.94 %c) stock X is riskier because it has higher standard deviation(which is a measuer of total risk)

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