Assume the probability of a pessimistic, most likely and optimistic state of nature is .25, .45 and .30, and the returns associated with those states of nature are 10%, 12%, and 16% for asset X.Based on this information, the expected return and standard deviation of return are:
A)12.0% and 4.0%
B)12.7% and 2.3%
C)12.7% and 4.0%
D)12.0% and 2.3%
E)none of the above

Question

Quizplus · Accepted Answer

The expected return is calculated as 0.25*10% + 0.45*12% + 0.30*16% = 12.7%. The standard deviation is calculated using the probabilities and returns, resulting in approximately 2.3%.

Assume the Probability of a Pessimistic, Most Likely and Optimistic