Question

The following data represent the probability distribution of the holding period returns for an investment in Lazy Rapids Kayaks (LARK) stock. State of the economy scenario?

Answer 1

a. The expected return on LARK stock is approximately 5.92%.

b. The standard deviation of the returns on LARK stock is approximately 17.25%.

Step-by-step explanation:

To find the expected return and the standard deviation of the returns on LARK stock, we'll use the provided probability distribution and the associated holding period returns (HPR).

a. Expected Return (E(R)):

E(R) = (0.28 * 28.40) + (0.336 * 7.90) + (0.25 * (-18.90))

E(R) = 7.984 + 2.660 - 4.725

E(R) = 5.919%

b. Standard Deviation (σ):

σ = √((0.28 * (28.40 - 5.919)²) + (0.336 * (7.90 - 5.919)²) + (0.25 * (-18.90 - 5.919)²))

σ = √((0.28 * 22.481²) + (0.336 * 1.981²) + (0.25 * 24.819²))σ = √(141.013 + 1.324 + 155.364)

σ = √297.701

σ ≈ 17.25%