Question

A stock's returns have the following distribution: Demand for the Company's Products Probability of This Demand Occurring Rate of Return If This Demand Occurs Weak 0.2 (32%) Below average 0.1 (9) Average 0.3 10 Above average 0.1 27 Strong 0.3 45 1.0 Calculate the stock's expected return. Round your answer to two decimal places. % Calculate the stock's standard deviation. Do not round intermediate calculations. Round your answer to two decimal places. % Calculate the stock's coefficient of variation. Round your answer to two decimal places.

Answer 1

1. expected return=Respective return*Respective probability

=(0.2*-32)+(0.1*-9)+(0.3*10)+(0.1*27)+(0.3*45)=11.9%

2.

probability	Return	probability*(Return-Expected Return)^2
0.2	-32	0.2*(-32-11.9)^2=385.442
0.1	-9	0.1*(-9-11.9)^2=43.681
0.3	10	0.3*(10-11.9)^2=1.083
0.1	27	0.1*(27-11.9)^2=22.801
0.3	45	0.3*(45-11.9)^2=328.683
		Total=781.69%

Standard deviation=[Total of probability*(Return-Expected Return)^2/Total probability]^(1/2)

=27.96%(Approx)

Coefficient of variation=Standard deviation/Expected Return

=(27.96/11.9)=2.35(Approx).