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Unformatted text preview: Risk and Return
1. a) Given the following economic forecast data, calculate the standard deviations for the following two stocks. Return on Stock Economic Condition Boom Normal Recession Probability 30% 50% 20% Orlando Utility 18% 10% 3% Orlando Technology 40% 14% -10% b) Assume these stock returns are normally distributed. Two-thirds of the time, each stock’s annual returns will fall within plus or minus one standard deviation of the expected return. What returns correspond with plus or minus one standard deviation? Standard Deviation with Holding-Period Returns
Calculating standard deviation using historical stock price data. Previous standard deviation calculations used forecast data and probabilities. In practice, we often use historical price data to estimate standard deviation. Instead of different probabilities, we assume that each return is equally likely. Fill in the following table. The expected return is just the average of the 12 monthly returns. When finished, sum the right column, divide by (n -1) and take the square root. Month Dec Jan Feb Mar Apr May June July Aug Sept Oct Nov Dec Price $50.00 $58.00 $63.80 $59.00 $62.00 $64.50 $69.00 $69.00 $75.00 $82.50 $73.00 $80.00 $86.00 Monthly Return Expected Return (monthly return - expected return)2 n ( k t - k )2 n-1 = t=1 Using the HP10B: Compute each monthly return and press + after each monthly return. After all 12 monthly returns have been entered, calculate the sample mean (expected) monthly return by pressing [shift 7]. Calculate the sample monthly standard deviation by pressing [shift 8]. If returns are distributed normally, we can be 95% certain that any month’s return for this stock will fall between plus or minus two standard deviations from the expected return. What returns correspond with plus and minus two standard deviations? ...
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- Spring '10