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: 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%.
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