Andre is considering an investment in Bristol Inc. and has gathered the following information. 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
Bristol Inc.
Recession .20 -10%
Steady .50 10%
Boom .30 45%
A) 17.48%
B) 122.63%
C) 20.13%
D) 5.14%
Answer: C
Explanation: C) Standard deviation = Σ[(rs - E(r))2 ∗ probs]1/2
= [(-10% - 16.50%)2 ∗ .20 + (10% - 16.50%)2 ∗ .50 + (45% - 16.50%)2 ∗ .30]1/2
= 20.13%.
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