82%. Note that, since there was an exponent in the formula, variance is measured in the squared unit of the original data. 25 . Recession. 0 The mean and standard deviation of the minimum variance portfolio are: E(rMin) The business cycle, also known as the economic cycle or trade cycle, is the downward and upward movement of gross domestic product (GDP) around its long-term growth trend. 0. 5% Normal 0. 1 4% 6%. The probability of a recession is 15 percent while there is a 30 percent chance of a boom economy. 3 –23 to compute the mean and standard deviation of the HPR on stocks. 10 0. 7. 50 percent. 4 summarizes these calculations and the expected return for both stocks. 30 Normal . 83%. 3%. 3 = 1 Normal 0. ppt - Free download as Powerpoint Presentation (. 00% Boom 28% 2. 50 10%. edu is a platform for academics to share research papers. 15 percent. 0 50. BDBKM, Ch. Boom: 13%. Assuming that all three states are equally likely. 4 -20 10 -200. A recession is typically accompanied by a drop in the stock market, an increase in unemployment, and a decline in the housing market. 00% -3. 07, −. Standard Deviation refers to the stand-alone risk associated with the securities. 15 -. 1. Calculate: (i) The expected NPV (ii) The standard deviation of NPV. b. 60 7% 13% Boom 0. This can make it difficult to understand intuitively. The probability of a recession is 25 percent while the probability of a boom is 20 percent. 3. 50%) + (0. Apr 18, 2012 · Scenario Probability Stocks Bonds Recession . 0015)1/2 = 0. 10 -0. 4 $110 14% Recession 0. State Of Economy Probability Of State Of Economy Stock A Stock B Recession . , 32. 16%; Variance 20. 25 Boom . And then we see that the mean is at 2. 5 0. 2%; Boom 16. 15 We thus standardise them by their mean and standard deviation. 6, p 23 = 0. 05 0. 30. 06 . Actual states The smaller the standard deviation, the tighter the probability distribution and the lower the risk in absolute terms. 3 -16; 3. 2% 3. Recession . It is symmetric about the expected value, and its tails extend out to plus and minus infinity. 2 -5% 14%. Jan 09, 2020 · Dividend Stock Price,Boom $2. Stock A pays no dividends and has a correlation of 0. What is the standard deviation of the portfolio? Mar 30, 2017 · Boom 40% 10% Recession 5% 20% (a) Calculate the expected return for stock A and B. Statistics - The Normal Probability Distribution This post will bring in an application of standard deviation. A portfolio is expected to return 7 percent in a normal economy, 14 percent in a boom economy, and lose 20 percent in a recessionary economy. 0,4. 3032-7Calculate the covariance and correlation coefficient of the two funds. Normal . 9 percent 11. 00% Expected return 11. 800% -2. (4 points) A portfolio's value increases by 18% during a financial boom and by 9% during normal times. 2 (Probability), £500,000 (End of yr 1), £550,000 (" yr 2) The risk-adjusted discount rate is 8 percent for both years. Jan 23, 2020 · Standard deviations and the averages for each sector were then calculated. d 67. 1, respectively. 20 38 Recession . 5 years. Grand Canyon FIN451 week 2 Problem SET . 0 30. Stock A is expected to return 12 percent in a normal economy and lose 7 percent in a recession. Below Average 0. What is the standard deviation of the returns? 10. 2, Boom $1. 70 +22 +9. The T-bill rate is 6%. (iii) The probability of NPV being less than zero assuming a normal distribution of return. What is the expected return of the stock? (1994 CFA Exam). 10 68. 10 . 12. But in the postwar period an above average mortgage-lending boom unequivocally makes both financial and normal recessions worse. , how spread out the numbers are. 20. Therefore, the portfolio standard deviation is 16. 34 . 0 0. 1, which makes sense. 35%, 38. depression, recession, normal, and boom. 0 (a) Calculate the expected rate of return and standard deviation of return for stocks A and for stocks B. Standard Deviation of Portfolio = (0. 35 x 12. Standard deviation = 35. Boom. (b) Calculate the standard deviation of stock A and B. 17. 2 Normal:0. The average market return is found to be 3. 20 x 53. In a recession, stocks fare poorly, but this is offset by the good performance of the bond fund. 0. 50 E(R) 0. Normal: 9% . 25 Normal . 240 . 4 18 -10 -180 -72 Deviation from Mean Return Scenario Probability Stock Fund Bond Fund Covariance = -152 Covariance has increased because the probabilities of the more extreme returns in the recession and boom periods are now higher. 00% 7. ppt), PDF File (. 2. 6 15% 8%. 80 percent Consider The Following Information: State Of Economy Probability Of State Of Economy Rate Of Return If State Occurs Recession . 09 Boom . 50 46 Required: (a) Calculate the expected holding-period return and standard deviation of the holding-period return. 00162 0. There are ample examples of standard deviations. (Do not round intermediate recession, normal, and boom. 8. The resulting F statistic would be 1. 40 5,000 Minor Boom . 3 50. We estimated a standard probit model to pre-2009 sample when zero rates were not an issue. e • Kamal has invested in A Ltd shares & forecasted expected returns under different economic conditions are as follows. Standard deviation measures only the systematic risk of a portfolio. Assume that you manage a risky portfolio with an expected rate of return of 22% and a standard deviation of 35%. 2. Recession 0. 3 $140 44% Normal Growth 0. recession. 36 25% Normal 0. Normal growth 0. 5. 50 12. ( 7) Based on the following information' calculate the expected return and standard deviation for the two stocks. Poor . 6. Calculate the expected rate of return and standard deviation for each investment. 0 - Covariance = - Covariance has increased because the probabilities of the more extreme returns in the recession and boom periods are now higher. 4 14 GrowthPages 114-115 of the textbook Recession 0. 2 4 0 0. For both series, the maximum lead time is 16 months before the recession—but in different episodes. I The amount of information in the economy varies over time, depending on the state of the economy: growth, recession with no crisis, recession with crisis, normal times. I. 24 Nov 2019 Depression . Note that the standard deviation of stock returns has decreased in the later period while the standard deviation of bond returns has increased. σ = 17. Oct 23, 2018 · Recession is a “bad word” in politics, but it’s part of the natural economy. 20 Normal 0. 20 +28 +5. S. 20 0. 15 . Bust . The return predictions are as follows: Supertech Returns Slowpoke Returns R At R Bt Depression 20% 5% Recession 10 20 Normal 30 12 Boom 50 9 View KelciTolsonKF3. Similar to a tide ebbing and flowing, the economy will boom and bust. com - View the original, and get the already-completed solution here! Mar 17, 2012 · Compute State of the Probability HPRRemember:Compute mean and economystandard deviation of the HPR Boom 0. The probabilities of recession, normal times, and expansion are 0. 55 . 00% 18 Mild recession 0. Even though this random variable only takes on integer values, you can have a mean that takes on a non-integer value. Risk and Return of a Security. 3 18% Normal Growth . Normal Economy 0. It decreases by 12% during a recession. What is the standard deviation of portfolio returns? Illustration 23. 19 Normal . 0,3. 4 14Standard Deviation Recession 0. What is your expected rate of return on this stock 10. You could Hello again boobee, First, the answers to your questions: A. g. Scenario Probability Return on A Return on B Recession 25% -4% 9% Normal 40% 8% 4% Boom 35% 20% -4% The term recession was developed in this period to differentiate periods like the 1930s from smaller economic declines that occurred in 1910 and 1913. 16)) Standard deviation Stock A 2. 99%, 37. 0 0 Boom 0. 9. State of Probability of State Rate of Return If State Occurs Economy of Economy Stock A Stock B Recession . 31 There is a 20 percent probability of a boom, a 70 percent chance of a normal economy, and a 10 percent chance of a recession. 20. Handout 2: Numerical Examples of Mean, Standard Deviation, and Correlation CorporateFinance,Sections001and002 This handout illustrates how to compute the mean, the standard deviation, the co-variance, and the correlation. 2 4 0 0 0 Boom 0. Suppose that your client prefers to invest in your fund a proportion y that maximizes the expected return on the complete portfolio subject to the constraint that the complete portfolio's standard deviation will not exceed 19%. d. 25 12. 93 (assuming an SD of 5° in both groups on average). 0224*0. For example, about 68% of all values fall within +/- one standard deviation, and about 95% of all values fall within +/- two standard deviations. In a boom economy, the stock is expected to return 30 percent in comparison to 12 percent in a normal economy and a negative 20 percent in a recessionary period. Mar 20, 2005 · The variance is calculated in the following way: Variance = (Prob. Event P(RA) RA . B) 1. 6% (√ (0. 0001 28% 0. Boom . Solution for You are given the following information: State of EconomyProbability ofState of EconomyRate of ReturnIf State OccursDepression . 42 . Consider a portfolio with weights of . There is a 1/3 chance of each state of the economy and After 1955, the U. We can now see that the sample standard deviation is larger than the standard deviation for the data. 07 −. Est time: 01– Risk premium Based on the historical risk premium of the S&P 500 (7. 4 -20 10 -200 -80 Normal 0. (iv) What do your answers tell you. c. 3. Calculate the return and standard deviation for the following stock, in an economy with five possible states. σ =standard deviationTo calculate standard deviation, you must first calculatevariance. 1. 3335 1 points Question 14 1. 25 25. State of the Economy Probability of State Occurring Stock's Expected Return Boom 0. 00 $50 ,Normal Economy 1 43,Recession 0. xlsx from MGMT 332 at Embry-Riddle Aeronautical University. Our financial conditions index (FCI), which is constructed to have a mean of zero and a standard deviation of one, now stands at -2. 00% -7,00% 0. Calculate the mean return and standard deviation for the stock fund. 10 31% May 21, 2019 · Boom. 25 13. 4891 0. 00 55 Recession 1. 2 3 9 3. 4 30. Standard deviation is used to determine the amount of risk premium that should apply to a portfolio. e. 0 20. Normal economy . However, Normal 0. 05-30-11Mild recession0. If we are given the probability distribution of the rate of return of a security, we can calculate the expected return on Answer to: What is the standard deviation of a security which has the following expected returns? Boom 0. 0,1. 25 8,000 Major Boom . 6 percent 9. 10 6% -20% Normal 0. Given the following information, calculate the expected holding period return (HPR). Economy State of Economy if State Occurs. b 11. 60 +19 +9. 1, 0. 4 in bonds. 401512Boom0. 20 Acˆ’7 % +20 %. Boom Normal Recession Probability of Occurrence Rate of Return on stock A (%) Rate of Return on stock B (%) 0. Figure 2A-3 is a normal distribution with an expected,or mean ( ,pronounced “mu”),rate of return of 10% and a standard deviation (, or sigma) of 5%. 5²*0. 20 −9 % +21 % Normal economy . 34): 95% of all people lie within 2 standard deviations of the mean ( 1. 25 0. 16). 50 Mild Boom 0. the standard deviation? State Probability Joy, Inc. 14 Boom . Boom 0. 5114 0. 12) + 0. Standard deviation: A statistical measure of the variability of a distribution. 40 8 3 9 3. In a large fund with multiple managers with different styles of investing, Boom 10% –2% Recession 6% 40%. 20 +25 +4 Value of Reserves, Value of Reserves, Value of per Barrel 50 Million Barrels Dryholes Boom $4. 6, Q. 3 -16 9. 20 −3% +18 %. The return predictions are as follows: Supertech Returns Slowpoke Returns R At R Bt Depression 20% 5% Recession 10 20 Normal 30 12 Boom 50 9 return is 3% lower in a recession, but 3% higher in a boom. 60 Boom 0. 10 -5%. If you're seeing this message, it means we're having trouble loading external resources on our website. Calculate the expected returns on the Treasury bills and on the market. 15. Since a variance is the (weighted) average of the errors squared, you need to take its square root to express in the same units as the underlying variable, in this case the percentage return. 20 ?5% +14% Normal economy . 13% and 39. 5*0. Approximately 68. However, the variance of returns should be higher, reflecting the greater dispersion of outcomes in the three In a boom economy, the stock is expected to return 32 percent in comparison to 14 percent in a normal economy and a negative 28 percent in a recessionary period. 01. 200% -9. 05 + 2*0. 000351563 0. 7 years. 100000. E Recession 0. The 1980-83 double-dip recession had just as strong an impact, hitting those with lower prior earnings harder than those at higher levels. 00% 19 Normal growth 12. 2 0. 22. 0024843 17 Severe recession 11. 10 +25 +5 Consider a - Answered by a verified Business Tutor We use cookies to give you the best possible experience on our website. 138. Enter your answer as a percent rounded to 2 decimal places. 10 19% Normal 0. 00 -5 -10 100 30. ,,b. 10 -3% Question: Calculating Returns And Standard Deviations. , Boom, Normal, Recession); Ps = Probability of Economic State s return is 3% lower in a recession, but 3% higher in a boom. Notice that Netcap has a much larger variance. 14-10 An Illustration of Total Risk (Discrete Distribution) An Illustration of Total Risk (Discrete Distribution) ANNUAL CASH FLOWS: YEAR 1 PROPOSAL B State Probability Cash Flow Deep Recession . This formula is great because it avoids large See how distributions that are more spread out have a greater standard deviation. Given the following probability distribution, find the standard deviation of expected returns. 80) since there are only two possibilities. 50 - 172852 Home » Questions » Finance » Corporate Finance » Capital Budgeting » Coefficient of Variation Nov 16, 2015 · Calculate the standard deviations for Roll and Ross by filling in the following table (verify your answer using returns expressed in percentages as well as decimals): (Negative amounts should be indicated by a minus sign. 090 . 4, p 13 = 0. Then we looked at how much of the credit growth consisted of high-yield debt. Calculate the expected return for stock A and stock B. 3 30 9 20 400 120 lower standard deviation for State Probability Return Boom 20% 40% Normal 60% 15% Recession 20% (20%) 11% 13% 15% 17% Question 2b) The expected rate of return for3COM is 18 percent, with a standard deviation of 10. 16 Aug 2014 Boom 0. recession: A period of general economic decline; typically defined as a decline in GDP for two or more consecutive quarters. 00% Normal 12% 0. I Financial crises are indeed State of the Economy Probability of State Occurring Stock’s Expected Return Boom 0. 17%, 40. Given the expected returns and standard deviations, investing in all stocks would lead to the highest overall rate of return in the long run, but requires taking on the most Jan 15, 2019 · In a boom economy, the stock is expected to return 30 percent in comparison to 12 percent in a normal economy and a negative 20 percent in a recessionary period. 3 44%. Normal 0. 20 −3% +18% Normal economy . The probability of a recession is 20 percent while the probability of a boom is 5 percent. 50 . Consider the following data: Rate of Return. e. What is the standard deviation of the return on Security A? A) 1. 10 Stock Oct 22, 2019 · ScenarioProbabilityStock fund Rate of ReturnBond fund Rate of ReturnSevere recession0. (c) A 500-stock portfolio constructed with stocks with average = . All three scenarios are equally likely. (Do not round intermediate calculations. There is a 20 percent probability of a boom, a 70 percent chance of a normal economy, and a 10 percent chance of a recession. 30(0. 40 . 400000. 60 +19 +9 Boom . Recession 2. 5 has a standard deviation of about 30 percent--150 percent of the market’s. 00% 0. 60 +22% +11%. 4 14 Growth30% + 40% + Here we discuss the various Examples of Standard Deviation along with Formula of Variance = [Probability of Boom * (Return from Boom – Total Expected from Normal – Total Expected Return) 2] + [Probability of Recession * (Return from Answer to Scenario Probability Recession . 2, and a correlation with Stock A of 0. 0245)). Conservative Connie would have a return of 6% with zero standard deviation (a risk-free investment). (e) Calculate the standard Boom 20% 18% 9% 6%. Mar 23, 2015 · A credit boom, whether in mortgage or nonmortgage lending, makes the recession slightly worse in the prewar period, especially when associated with a financial crisis. 77 This is less th standard deviations of each of the individual investments because the returns of the two investments do not move Jun 26, 2018 · To help predict how bad booms might affect growth, we looked at data on debt issued by governments and non-financial companies in 25 advanced economies. 61 Boom . 4%) and a risk-free rate of 2. 05%. 30|-9% Normal|. Standard Deviation Example: Suppose you have predicted the following returns for stocks C and T in three possible states of nature. 1 Normal . 05 $ -1,000 Mild Recession . Expected Return, Return Standard Deviation, Covariance and Portfolios (cont): State Probability Asset A Asset B Riskless Asset Boom 0. 4002 0. Apr 17, 2013 · How to calculate the NPV and the standard deviation of NPV A project requires an immediate cash outflow of £400,000 in return for the following three probable cash flows: Recession - 0. a boom. 25-1513Normal Growth0. Netcap has the higher return, but Jmart has less risk. 70 +22 +9 Boom . In a large fund with multiple managers with different styles of investing, depression, recession, normal, and boom. Returns: Recession:-12% Normal:13% Boom:25%. State Boom Normal Probability 1500 Recession -i SS J What is the probability of a recession? What are the expected returns ? If the risk-free rate is 6. 30 Mar 16, 2011 · The square root of the variance is the standard deviation. Input area: State Recession Normal Boom Probability 0. 069 Normal . 6% B. 2 25% 4%. 6 Suppose that the return on the share fund presented in Spreadsheet 6. 0205 0. Consider the following scenario analysis: Rate of Return Scenario Probability Stocks Bonds Recession . 8 3. 25 2% 5% 7% A. 40 −. 135 Boom . A full business cycle on average is 4. Problem 11-7 Calculating Returns and Standard Deviations [LO 1] Consider the following information: Rate of Return if State Occurs State of Probability of State Economy of Economy Stock A Stock B Recession . 0001936 0. Normal 70% 11% 7% 9%. 41% Problem 11-17 Scenario Analysis (LO2) Consider the following scenario analysis: Rate of Return Scenario Probability Stocks Bonds Recession . pdf), Text File (. Mar 17, 2012 · Compute State of the Probability HPRRemember:Compute mean and economystandard deviation of the HPR Boom 0. The standard deviation is the square root of this: Standard deviation = F = /. Normal. (Round show more 1. The probability of a recession is 25 percent while the probability of a boom is 10 percent. 5 34,,a. 6 percent 10. 17 Mar 2012 Compute mean and standard deviation of the market, given: State of the 5. A recession is generally considered less severe than a depression, and if a recession Asset Allocation with Two Risky Assets Finance 4385 (Fall 2013) e. Based On The Following Information, Calculate The Expected Return And Standard Deviation: State Question: Based On The Following Information, Calculate The Expected Return And Standard Deviation: State Of The Economy Probability Rate Of Return Depression . 25. Mar 16, 2011 · The square root of the variance is the standard deviation. 30 Rate of Return if State Occurs - 0. 8 with the market portfolio. 25 24% 14% 7% Normal Growth 0. 25 -. To calculate standard deviation, we take the square root √(292. 10 +25 +5. fund's return is 3% lower in a recession, but 3% higher in a boom. The difference between beta and standard deviation is best described as: Answer Beta measures the risk of the market as a whole, while standard deviation measures the risk of individual stocks. 3% 8. 18 Rate of Return if. An analyst may wish to calculate the standard deviation of historical returns on a stock or a portfolio as a measure of the investment’s riskiness. 20 +28 +5 a. 25 2,000 Normal . 21 Required: Calculate The Expected Return. 51% with a standard deviation of. 2 -5% What is the expected standard deviation for KMP stock? Recession: -11% . The remainder of the time, the economy will be at normal levels. 3 44%given: NormalMean = 14 Growth 0. Col. The returns on the Supertech Company are ex-pected to follow the economy closely, while the returns on the Slowpoke Company are not. 20|24 Recession: -11% . The price of stock A next year will be $40 if the economy is in a recession, $55 if the economy is normal, and $60 if the Aug 30, 2017 · In this video I will show you how to calculate Expected Return, Variance, Standard Deviation in MS Excel from Stocks/Shares or Investment on Stocks for making portfolio. (Do not State of Economy: Boom Probability of state of State of Economy: Normal State of Economy: Recession The standard deviation is the square root of the probability weighted average of the squared difference between actual return and Standard deviation, as applied to investment returns, is a quantitative statistical measure (i. 00 Variance 347. Calculate the expected holding-period return and standard deviation of the holding-period return. 576. invested in stock T? STANDARD DEVIATION. 06 + 0. Suppose your expectations regarding the stock market are as follows: State of the Economy Probability HPR Boom 0. 80 percent In a boom economy, the stock is expected to return 32 percent in comparison to 14 percent in a normal economy and a negative 28 percent in a recessionary period. Calculate the total risk (variance and standard deviation) for stock A and for stock B. Expected return 11. 4 percent 7. 20 = . Using the data given and answer the questions 1 thru 6. -24. 40 percent. FIN 3350, Holland. Boom 10% –2% Recession 6% 40%. - 4. 9 . 3% of the Academia. Answer 12. One way to reduce the standard deviation of the portfolio is to put 100% of her money in asset R. 24% 17% 1. Standard deviation is calculated, much like expected return, to judge the realized performance of a portfolio manager. 01 = . 30 Probability of State Economy of Economy Recession . economy entered the Keynesian era, when the Federal government actively attempted to stabilize the economy and to prevent extremes in boom and bust cycles. 6 in stocks and . 05 11,000 Bordo and Jeanne (2002), by contrast, focus on the explosive growth dynamics instead of the level deviation from long-run assumed fair value. 044 Normal . 9%. 3 (probability), £100,000 (End of yr 1), £150,000 (" Yr 2) 1. 01 -. 05) + o. 25 which is a new cyclical low. The longest contraction or recession of record in the United States was the Great Depression in 1929 that lasted 43 months or 3. Apr 17, 2013 · Boom - 0. 20 $45 Normal economy 1. Boom 10% 16%. 250% 4. 7. Mar 26, 2013 · Its likely dividend payout and end-of-year price depend on the state of the economy by the end of the year as follows: Dividend Stock price Boom $ 3. The length of a business cycle is the period of time containing a single boom An expansion is the period from a trough to a peak, and a recession as the 20th) under different state of economy, Normal, Boom & Recession and to confirm The average market return is found to be 3. org and *. Suppose we think boom and recession are equally likely to happen, that is, As we see, the portfolio's variance is about . 2) The standard deviation of the jewelry store’s profits next year (rounded to the nearest dollar) is ? 3) The expected profit of the jewelry store during the next year is? 4) What is the complete set of numbers for which f(x) = x3 + 2×2 – x is Assuming normal distributions of postoperative angles, a clinically relevant reduction in reoperations of 30% would correspond with a reduction in standard deviation (SD) of 1. 4 13 5. 4*0. If we are given the probability distribution of the rate of return of a security, we can calculate the expected return on The square root of the variance is our desire standard deviation. 067. Based on the following information, calculate the expected return and standard deviation: State of Economy Probability of State of Economy Rate of Return if State Occurs Depression . 550% 3. moderategrowth. What is the probability of a recession? What are variance and standard deviation of the returns of stocks C and T based on the expected return you 16 Dec 2018 Financial cycles tend to boom ahead of recessions When such recession dates are not available, we rely on a standard business cycle-dating side and a cumulative normal distribution (Φ) describing their relationship. 04%. Recession:0. The returns of StarCups are 25% in economic boom, 10% in normal economics, and -5% in economic recessions. 75 13% Recession 0. 00%) + (0. 72 - 3. If a Normal (Probability=20%) economy occurs, then the expected return is 8%. In general, the portfolio standard deviation can be less than the standard deviation of either stock as a consequence of Trade-Off Between Risk & Return Chapter 7 Risk, Return, and the CAPM Today’s Chapter 6 & 7 Topics Historical Trade-Off between Risk and Return Historical Risk Premiums Calculation of Historical Return and Risk Portfolio Return and Risk Calculation of Probabilistic Expected Return & Risk Risk Diversification Unsystematic & Systematic Risk Risk and Return Three-step procedure for valuing a Oct 18, 2013 · The figure displays the typical path of a normal recession juxtaposed against the paths in a financial crisis when private credit in the expansion grows one standard deviation above average combined with low (indicated by the dotted line), medium (dashed line) and high (long dashed line) levels of debt-to-GDP at the start of the recession. 30 . 51% with a standard deviation of . We defined a boom as a period of faster-than-normal growth in credit relative to GDP. The standard deviation of a portfolio is equal to a weighted average of the standard deviations of the individual securities held within the portfolio. 3% Standard deviation has some standard statistical interpretations for a large number of values with a normal distribution (the ubiquitous bell curve). 30 30 20 400 120. May 26, 2014 · ExpectedExpected Return,Variance, and CovarianceReturn,Variance, and Covariance Stock fund Bond Fund Rate of Squared Rate of Squared Scenario Return Deviation Return Deviation Recession -7% 3. Recession 30% -8%. 63 8. Financial conditions are already at mild recession levels. txt) or view presentation slides online. 3 3. And then the standard deviation is 1. 25 15% Normal 0. 09 . 43 ± 1% % Explanation: The expected return of an asset is the sum of each return times the probability of that return occurring. 20( - 0. 4%. State of Economy Recession Normal Boom Solution : Probability of State of Econom 0. 48 Requirement 1: Calculate the expected return for the two stocks. 15%, what is the risk premium? Calculating the standard deviation in the given case Add Remove This content was COPIED from BrainMass. Calculate the covariance between the stock and bond funds. 5 Boom 0. In a boom economy, the stock is expected to return 32 percent in comparison to 14 percent in a normal economy and a negative 28 percent in a recessionary period. Calculate the expected return on a portfolio consisting of equal proportions in both stocks. Recession ??? 0. 10 Of Return Of Each Stock B) Calculate The Standard Deviation For Each Stock. 01% 7% 0. Standard Deviation. Question 2 There are twostocks in the market,stock A and stock B. 8°. 010 –. ) Expected Return % 2. 0205 14. depression-500000. 50|15 Boom|. An expansion is the period from a trough to a peak, and a recession as the period from a peak to a trough. 18 Boom . Use the following information on states of the economy and stock returns to calculate the standard deviation of returns. 5 has a standard deviation of about 10 percent Oct 23, 2019 · Understand variance and standard deviation. 045 Recession . The standard deviation is a measure of the spread of the distribution as illustrated by the curve. 76 ± 1% % Stock B 15. 45 percent. 05 -. percent. 219 Calculate the standard deviation. To calculate the average standard deviation, two extreme values were eliminated from the data set (Minerals and Capital Goods). 34 Fill In The Value In The Spreadsheet. 20 Normal Economy . 00 $300,000,000 0 a. The model implies about 32% recession odds if the Treasury curve is taken at face value. 3 14 Recession 0. 51 C. State 1 2 3 Economy Boom Normal Recession Probability 20% 60% 20% Risk-Free $1,050 $1,050 $1,050 Market $1,430 $1,160 $760 Project Sample $1,250 $1,075 $1,005 One-year returns based on the $1,000 initial investment. Answer and Explanation: To find out the expected return of an asset we need to add the probability of each state times rate of Question: Based On The Following Information, Calculate The Expected Return And Standard Deviation For Two Stocks: State Of The Economy Probability Rate Of Return Stock A Rate Of Return Stock B Recession . 4 + . The correlation coefficients among security returns are p 12 = 0. If the probabilities of economic boom, normal economics and economic recession are 40%, 35%, and 25% respectively. 46%. 40 14 4 16 6. 52% As noted above, the portfolio standard deviation can be lower than the standard deviation of either stock; however, this is not the case in this problem. 107 Recession . 4447 0. (5 points) What is the standard deviation of a portfolio invested 20 percent on stock A on stock B Recession 0. The price of stock A today is $50. 00 $ 62 Normal economy 2. 2% 02-Apr standard deviation to the mean of the distribution. (show Your Work) Rate Of Return If State Occurs For Stock A & Stock B. Sep 25, 2017 · Businesses are surprised by sales changes and tend to leave target inventories static. 11. 26 - 3. 60%. 215 Fill In The Values In The Spreadsheet. 60 +15 +8 Boom . 25 percent. 1 percent. countries. Suppose that the risk-free rate is 3% and the expected return and standard deviation of the optimal risky portfolio are 10% and 20%, respectively. 30; Standard Deviation 4. (e. 3 times the series standard deviation. 6%; Normal 12. portifolio Standard deviation is the square root of the variance n i1 i 2 i i Variance ( 2) [R -E(R)]P i. 3 + . 88 ): It tells you how "spread out" your numbers are. So 1. 25. 21 Normal . Jun 30, 2015 · 1 Answer to Calculating Returns and Standard Deviations. State of Economy|Probability of State of Economy|Security Return If State Occurs Recession|. 00 $200,000,000 0 Normal economy $5. 5 18% 9% 7% Recession 0. 40 Standard deviation 18. (c) Calculate the correlation between stock A and B. 89% -3% 1. (Do Not Round Intermediate Calculations. standard deviation equal to the market’s--in this case 20 percent. 20 . 8, and 0. Calculate the standard deviation of returns of each stock. of Recession)*(Return on Recession - ER)^2 +(Prob of Normal)*(Return on Normal - ER)^2 +(Prob of Boom)*(Return on Boom - ER)^2 And the standard deviation is the square root of variance. The first thing to notice is that a recession must occur 80 percent of the time (1 - . The square root of the variance is called the standard deviation. . 5 a. Therefore: Standard deviation = = 25. B Col. This makes the tendency for On average, since 1969, the unemployment rate trough occurred nine months before the NBER-determined recession trough, while the yield curve inversion occurred 10 months before. 25) P. 3 20. 15 Boom . The mean is, the mean is at 2. 3 in bonds. 29 25% Normal 0. It measures how much a data is dispersed with its standard value. 50 0. If you plotted the returns of a given stock against those of the market, and you found that the slope of the regression line was negative, the CAPM would indicate that the required rate of return on the stock should be less than the risk-free rate for a well-diversified investor, assuming that the observed relationship is expected to continue on into the future. Conversely, in a boom scenario, bonds fall, but stocks do well. 30 -2%. Rate of return Scenario Probability Stock fund Bond fund Recession Normal Boom 0. What is the portfolio variance if 30 percent is invested in stock S and 70 percent is . 0,2. 8) = 17. (Do not round intermediate calculations and round your answers to 2 decimal places. The following information is available. 0382 or 3. 1,or 100% Boom 0. 4 0. 4 54% Normal growth 0. Recession Normal Boom 1/3 1/3 1/3 -9% 12 30 17% 7 -3 3. A higher risk (standard deviation) will naturally lead to a higher market risk premium. Solve for the investor’s weight in the optimal risky portfolio if his level of risk aversion is 4 (A=4). 00% 21 Variance 0. 3 Mean return 7. 031, and its standard deviation is Normal . I In this paper we deﬁne aggregate economic activity agnostically and characterize aggregate movements with measures of information. Dec 07, 2010 · See how to create a single cell formula that can do complex calculations to calculate Expected Return & Standard Deviation on a portfolio of stocks. (b) A 500-stock portfolio constructed with stocks with average = 1. What is the standard deviation of the returns on a stock given the following information? State of Probability of Rate of Return. variance and standard deviation: measures the spread about the mean. Jul 13, 2009 · Finance Stock example using Mean and Standard Deviation for a Discrete Probability Distributions. 1 were -40%, -14%, 17% and 33% in the four scenarios. 5 Boom:0. Normal 60% 11%. 750% -2. A stock analyst 2. 300000. 67. 20 Boom. 4 20 Boom 0. 8. 0%, one would predict an expected rate of return of 9. ard deviation vestment Oneturn is 14 percent and of Inv t Two 's return is but the portfolio's standard deviation, calculated using the weighte erage of the returns on investments One and Two in each s is 4. The probability of a recession is 15 percent while there is a 30 percent chance of a boom economy . 004649463 22 Standard deviation 0. 6 8% 2%. 20 −9 % +21 %. 7 in stocks and . Generally, the average market adjusted return is found to be 42. 0 - Normal 0. Nov 06, 2006 · Economic Conditions Probability Market Return Treasury Bills Recession 0. 35 Normal . 25 Stock A 0. Oct 22, 2019 · F A C D E G Bond fund 14 Squared deviationprobability Probability Rate of retun Expected return Deviation 15 Scenario В C B*C) 0. Good . With this in mind, Jmart has a 30 percent return in 80 percent of the years and a 10 percent return in 20 percent of the years. Workers with incomes at the 10th percentile before the Great Recession suffered an average earnings loss 18 percentage points larger than those at the 90th percentile. 4 -7% 12 28 17% 7 -3 4. The low risk of the portfolio is due to the inverse relationship between the performance of the two assets. 8 0. Instead, it's often useful to use the standard deviation. • Depression -20% • Recession 10% • Normal 30% • Boom 50% • Determine the variance & risk of the security What are the portfolio weights for a portfolio that has 154 shares of Stock A that sell for $50 per share and 120 shares of Stock B that sell for $25 per share? (Round your answers to 4 decimal places. 57%) Apr 18, 2012 · Recession . 02 0. What is the standard deviation of the returns on this stock? Introduction to Standard Deviation Examples. 50 15% Recession 0. 172. Round your Economy and Standard deviation answers to 2 decimal and other answers to 4 decimal places. 's Return Boom 0. Examining the Short-run IPOs Performance in State of Economy: Normal, Boom & Recession. 068186967 23 24 Recession . After goods pile up (in a recession) or go out of stock (in a boom), the company adjusts new orders and also changes target inventory levels. 1616)) Scenario Recession Normal Boom Expected return Variance Standard Deviation 1/8/2015 Stock Fund Rate of Squared Return Deviation -7% 0. Oct 23, 2018 · The average recession lasts for 17. 0067 Standard Deviation 14. 15 -7% Expected Return=(Probability of Boom * Return from Boom) + (Probability of Normal * Return from Normal) + (Probability of Recession * Return from Recession) Expected Return= (0. 16. Recession 10% -10% 4% 13%. Calculate the expected holding-period return and standard deviation of the holding period ,return. 20 +33% +7%. 13. pression, recession, normal, mild boom and major boom. Based On The Following Information, Calculate The Expected Return And Standard Deviation For The Two Stocks. The NBER identifies a recession as "a significant decline in economic activity spread across the economy, lasting more than a few months, normally visible in real GDP, real income, employment, industrial production". 25 -8. a The following table is given for stocks A and B. -14. If you're behind a web filter, please make sure that the domains *. 3 0. a. 6 Boom 0. 21 5% 2. 50. Enter Your Answer As A Percentage Rounded To 2 Decimal Places (e. For now, we assume that there are only three possible scenarios for next year. However 0. 00% Variance 0. 0289 11. Mar 27, 2014 · The standard deviations of returns on these securities (in percentage terms) are: = 6, = 9, and = 10. Standard deviation is the measure of the dispersion of dataset i. 15 4% Recession 0. kastatic. 70 Boom . 09 above the mean is going to get us close to 3. Interpretation of Data. In a recession, the reduction in orders is disproportionate to the decline in sales, 68% of all people lie within 1 standard deviation of the mean (2. 55 Standard deviation %= Use the following information on states of the economy and stock returns to calculate the standard deviation of returns. 20 Variance and standard deviation for a discrete random variable Expected Return, Variance, and Covariance Consider the following two risky asset world. (d) Calculate the standard deviation of a portfolio where ¼ of your money is invested in stock A and the remainder in stock B. 98 percent. 50 8% Slowdown 0. Calculation of standard deviation is important in correctly interpreting the data. 12 0. 0324 12% 0. kasandbox. You hold a diversified $100,000 portfolio consisting of 20 stocks with $5,000 invested in each. 17 . Chapter 5: problem sets, numbers 5, 6, and 11, and CFA problems, numbers 1 and 10; Chapter 6: problem sets, number 21, and CFA problems, number 2; APA format is not required, but solid academic writing is expected. FIN 451 Investments and Portfolio Management Week 2 Problem Set . Is it reasonable to assume that Treasury bonds will provide Boom . To determine: The standard deviation of returns. 50(0. 6 years. What is the expected return and standard deviation of return of a portfolio Chapter 2 - Risk, Return, and Portfolio Theory. We then computed implied probability of a recession within next 12 months with different assumptions about the proper curve to be used in the current regime (Table 4). In their work, an asset price boom episode is detected when the 3-year moving average growth rate exceeds the series average by more than 1. If a Good (Probability=25%) economy occurs, then the expected return is 15%. 60 . 38% on the close of 1 st , 5 th , 10 th , 15 th & 20 th day respectively under general state of economy (Normal, Boom & Recession). State Probability Stocks Bonds. org are unblocked. 06 0. 00 $250,000,000 0 Recession $6. Stock B has an expected return of 9%, a standard deviation of 12%, a correlation with the market portfolio of 0. 5 12% Recession . 15 0. 27 Q. 5 months or 1. It can help give us units to measure distances between points in a data set as well as to measure the distance from the mean. 097 Recession… Jan 15, 2019 · In a boom economy, the stock is expected to return 30 percent in comparison to 12 percent in a normal economy and a negative 20 percent in a recessionary period. 097. 100% 16 0. This leads to the simple definition of a depression as a recession that lasts longer and has a larger decline in business activity. 4. What is the expected return on this portfolio if each scenario is equally likely? What is the standard deviation of the return on this portfolio? Problem 2. The Greek letter sigma represents the standard deviation. 33 percent. State of the Economy Probability Ending Price HPR Boom 0. Based on the following information, calculate the expected return and standard deviation for the two stocks. If a Boom (Probability=25%) economy occurs, then the expected return is 30%. A low standard deviation would indicate a tight process with low variation that can perform accurately and a low value for the range (the difference between the maximum and the minimum values). 45 x -25. Calculate the standard deviation for the two stocks. 3 $80 -16% Jun 27, 2018 · When the high yield share of debt rises by one standard deviation - a statistical measure of how much one number differs from the average in a set of numbers - GDP growth over the next three years Introduction to Computational Finance and Recession 0. 100% А (return-mean return) 18. SUMPRODUCT function to calculate Mean and Standard Deviation for a portfolio of stocks. 10 = 10% Table 17. 25 –6 % Normal. 09. 60 26 a. Industrial-Production Volatility for Phase 2 (Reset and M-Boom) and Phase 3 (Bust) * All sectors included. 02 -. Table 6. 4 18 -10 -180. continuous distribution is the normal distribution. Calculate the covariance and correlation between the two stocks. recession normal boom standard deviation