RTF stock is expected to return 10.6 percent if the economy booms and only 4.2 percent if the economy goes into a recessionary period. The probability of a boom is 55 percent while the probability of a recession is 45 percent. What is the standard deviation of the returns on RTF stock?

3.16%

Explanation:

Return   Probability   Expected return μ    r - μ     (r - μ)^2   P(r)*(r - μ)^2

10.60%        0.55                 5.83%               2.88%   0.08%          0.05%

4.20%         0.45                  1.89%               -3.52%   0.12%           0.06%

Total Expected return   =   7.72%                              Variance     0.10%

Variance = 0.10%

Standard deviation = √Variance

Standard deviation = √0.001

Standard deviation = 0.031622

Standard deviation = 3.16%

Thus, the standard deviation of the returns on RTF stock is 3.16%

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