Problem Solving Exercise Expected Value & Standard Deviation Consider 2 companies: Yesterday's Equestrian Products (YEP) & Northern Optical Producers (NOPe). Seemingly, these companies have little to do w/ each other, but it turns out that their stock returns move closely together. Company Economic Condition & Economic Growth Probabilities Recession (20%) Slow Growth (20%) Expansion (60%) YEP -6% Return 2% Return 8% Retur NOPE -4% Return 2% Return 12% Return When the economy is in a recession, which occurs 20% of the time, YEP loses 6% & NOPe loses 4%. When the economy is growing slowly, which occurs 20% of the time, YEP gains 2% & NOPe gains 2%. When the economy is expanding rapidly which occurs 60% of the time, YEP gains 8% & NOPe gains 12%. 1) What is the expected return for YEP & NOPe? expected return E(X) = PX, +PX + P.X Use this formula for 2) What is the standard deviation of returns for YEP & NOPe? Use this for standard deviation, SD = TP.(X-E(x))+ P.(X.- E(x)) +P (X-E(x))