Intro

You've estimated the following expected returns for a stock, depending on the strength of the economy:

State (s) Probability Expected return

Recession 0.3 -0.06

Normal 0.5 0.05

Expansion 0.2 0.1

What is the expected return for the stock?

Correct The expected return is the weighted average return across all states of the economy:

E ( r ) = s ( p s E ( r s ) ) = 0.3 * (-0.06) + 0.5 * 0.05 + 0.2 * 0.1 = 0.027

Part 2

What is the standard deviation of returns for the stock?