Question

Rocket Medical Corp. believes the following probability distribution exists for its stock. What is the coefficient of variation on the company's stock? Do not round your intermediate calculations. ​State of the Economy Probability of State Occurring Stock's Expected Return Boom 0.25 28% Normal 0.55 15% Recession 0.20 -2%

Answer 1

Expected return=Respective return*Respective probability

=(0.25*28)+(0.55*15)+(0.2*-2)=14.85%

probability	Return	probability*(Return-Expected Return)^2
0.25	28	0.25*(28-14.85)^2=43.230625
0.55	15	0.55*(15-14.85)^2=0.012375
0.2	-2	0.2*(-2-14.85)^2=56.7845
		Total=100.0275%

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

=(100.0275)^(1/2)

=10.00%(Approx)

Coefficient of variation=Standard deviation/Expected Return

=10.00/14.85

=0.673(Approx)