# HB Harvard Business Publib My Questions bartlebB Chapter 7 - MBAD-503+HBLauren Stoney | Net ImMindTap - CengagXAhttps://ng.cengage.com/static/nb/ui/evo/index.html?elSBN=9781337900010&id- 5432476578snapshotld=1286803&CENGAGE MINDTAPQ Search this courseXCh 08: Assignment - Risk and Rates of ReturnమాFor example, the continuous probability distributions of rates of return on stocks for two different companies areshown on the following graph:A-ZPROBABILITY DENSITYOfficeCompany ACompany B-40-200204060RATE OF RETURN (Percent)Based on the graph's information, which of the following statements is true?O Company A has a smaller standard deviationCompany B has a smaller standard deviationX HB Harvard Business Publib My Questions bartlebB Chapter 7 - MBAD-503Lauren Stoney | Net Im+HBMindTap - CengagXAhttps://ng.cengage.com/static/nb/ui/evo/index.html?elSBN=9781337900010&id- 5432476578snapshotld=1286803&CENGAGE MINDTAPQ Search this courseXCh 08: Assignment - Risk and Rates of ReturnConsider the following case:మDavid owns a two-stock portfolio that invests in Happy Dog Soap Company (HDS) and Black Sheep BroadcastingA-Z(BSB). Three-quarters of David's portfolio value consists of HDS's shares, and the balance consists of BSB's shares.Each stock's expected return for the next year will depend on forecasted market conditions. The expected returnsOfficefrom the stocks in different market conditions are detailed in the following table:Market Condition Probability of Occurrence Happy Dog Soap Black Sheep Broadcasting45%Strong25%63%Normal45%27%36%-36%Weak30%-45%Calculate expected returns for the individual stocks in David's portfolio as well as the expected rate of return of theentire portfolio over the three possible market conditions next yearThe expected rate of return on Happy Dog Soap's stock over the next year isThe expected rate of return on Black Sheep Broadcasting's stock over the next year isThe expected rate of return on David's portfolio over the next year isX

Question
Step 1

First question: Please examine the graph of the probability of the rate of return.

• Compnay B has a wider spread of rate of return in comparison to A
• Higher the spread or variability of return , higher will be the standard deviation
• Hence, A has smaller standard deviation.
• Henc, the correct answer is the firt option.
Step 2

Second question:

E(R) = The expected retrun

Pi = probability of market condition i

R...

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